Most efficient way to re-use correlation/covariance matrix multiple times

Hello!

I have a financial time series problem where I assume that the covariance matrix at any point is given by a combination of the asset volatilities and the correlation matrix, ie

Sigma[t] = quad_form_diag(correl_matrix, vol[t])

where correl_matrix is an [n.n] correlation matrix and vol is a length n vector.

I later have a likelihood at each point that is multivariate Student-t.

The likelihood function involves the term

(r[t] - mu)' * inverse(Sigma) * (r[t]-mu)
= (r[t] - mu)' * inverse(quad_form_diag(correl_matrix, vol[t])) * (r[t]-mu)

Obviously I don’t want to re-calculate inv(Sigma) (either implicitly or explicitly) at each time step due to the O(n^3) complexity.

Is there a recommended to repeatedly calculate likelihoods with these quadratic forms involved?

The algebraic way would be keeping the inverse of the correlation matrix and then re-using it repeatedly, eg

(r[t] - mu)' * quad_form_diag(inverse(correl_matrix), inverse(vol[t])) * (r[t]-mu)

…but I can appreciate that using the direct inverse might not be the most stable or efficient way to do it.

I know about the mdivide functions and could work with the lower triangular decomposition of correl_matrix, but I’m not sure whether repeatedly calling eg mdivide_left_tri_low(correl_matrix_L * vol[t], r[t] - mu) will incur a much higher operations count

Thanks!

3 Likes