This function computes the covariance matrix using two different decay factors.
Usage
DoubleDecay(x, decay_low, decay_high)
Arguments
- x
A set of relevant risk drivers.
- decay_low
A numeric
value with the low decay (long half-life).
- decay_high
A numeric
value with the high decay (short half-life).
Value
A list
with the posterior mean ans sigma.
Details
A common practice is to estimate the covariance of the risk drivers using a high
decay (short half-life) for the volatilities and a low decay (long half-life)
for the correlations.