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10.4.2 The optimal decay model

The optimal decay model is a generalisation of the RiskMetrics model where the optimal decay is not predetermined at 0.94. The objective function is the likelihood function. In

9 A matrix is positive definite as long as its minimum eigenvalue is strictly positive. This is crucial for risk management purposes because otherwise a linear combination of assets in the portfolio can yield to a negative portfolio variance. For a more detailed explanation, refer to J.P. Morgan (1997).

S Microsoft Excel - Bourgoin002.XLS

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