Algorithm generates correlation matrices with fixed mean absolute discrepancy for model robustness studies, indicating strong utility in financial stress testing.
This article describes a simple and fast algorithm for generating uniformly sampled correlation matrices (R) with a fixed mean absolute discrepancy (MAD) relative to a target (population) Rpop. The algorithm can be profitably used in many settings including model robustness studies and stress testing of investment portfolios, or in dynamic model-fit analyses to generate R matrices with a known degree of model-approximation error (as operationalized by the MAD). Using results from higher-dimensional geometry, I show that Rn×n matrices with a fixed MAD lie in the intersection of two sets that represent: (a) an elliptope and (b) the surface of a cross-polytope. When n = 3, these sets can be visualized as an elliptical tetrahedron and the surface of an octahedron. An online supplement includes R code for implementing the algorithm and for reproducing all of the results in the article.
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Niels G. Waller (2025) studied this question.
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