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Asked by Kevin van Berkel on 12 Jun 2013

Hi guys,

I have the following model:

function [R_e, dp] = VAR_CRSP(M,T,r_f);

epsilon = zeros(M,T,2); r = zeros(M,T); dp= zeros(M,T);

for m=1:M epsilon(m,:,:,: ) = mvnrnd([0;0;0], [0.0012,-0.001;-0.001,0.0027],T) end

for m=1:M dp0=-3.461; r(m,1) = 0.1161+0.060*dp0 + epsilon(m,1,1); dp(m,1)=-0.052+0.9702*dp0 + epsilon(m,1,2);

for i = 1:T-1 r(m,i+1) = 0.1161+0.060*dp(m,i) + epsilon(m,i+1,1); dp(m,i+1) = -0.052+0.9702*dp(m,i) + epsilon(m,i+1,2);

end end

end

Now i want to add a extra variable to the model. I did it as simply as this, but I don't think it's the correct way:

function [R_e, dp] = VAR_CRSP(M,T,r_f);

epsilon = zeros(M,T,3); r = zeros(M,T); dp= zeros(M,T); mom=zeros(M,T);

for m=1:M epsilon(m,:,:,: ) = mvnrnd([0;0;0], [0.0012,-0.001,0.0001;-0.001,0.0027,0.001;0.001,0.001,0.001],T) end

for m=1:M dp0=-3.461; r(m,1) = 0.1161+0.060*dp0 + epsilon(m,1,1); dp(m,1)=-0.052+0.9702*dp0 + epsilon(m,1,2); mom(m,1)=-0.344+0.966*dp0 + epsilon(m,1,3);

for i = 1:T-1 r(m,i+1) = 0.1161+0.060*dp(m,i) + epsilon(m,i+1,1); dp(m,i+1) = -0.052+0.9702*dp(m,i) + epsilon(m,i+1,2); mom(m,i+1) = -0.533+0.931*dp(m,i) + epsilon(m,i+1,3); end end

R_e = r_f*exp(r)-r_f;

end

My first error is:

Error using mvnrnd (line 110) SIGMA must be a symmetric positive semi-definite matrix.

Error in VAR_CRSP (line 9) epsilon(m,:,:,:) = mvnrnd([0;0;0], [0.0012,-0.001,0.0001;-0.001,0.0027,0.001;0.001,0.001,0.001],T)

So anyone knows how to resolve this?

Many thanks in advance!!

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Answer by Matt J on 12 Jun 2013

Edited by Matt J on 12 Jun 2013

Accepted answer

>> SIGMA=[0.0012,-0.001,0.0001;-0.001,0.0027,0.001;0.001,0.001,0.001]; >> eig(SIGMA)

ans =

-0.0001 0.0016 0.0034

As you can see, your SIGMA matrix has a negative eigenvalue, and is therefore not positive semi-definite.

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