How To Fix RY627 - Correlation matrix has negativ definition; VaRC calculation prevented

SAP Error Message - Details

• Message type: E = Error

• Message class: RY - Messages for RM Basis

• Message number: 627

• Message text: Correlation matrix has negativ definition; VaRC calculation prevented

What causes this issue?

The correlation matrix of risk factors is defined negative and also
inconsistent.

System Response

The VaR contribution (VaRC) cannot be calculated.

How to fix this error?

When you determine the correlation matrix using the statistics
calculator (transaction TVS1), you can ensure the consistency of the
correlation matrix by setting the Adjust Correlation Matrix indicator.

Procedure for System Administrators

The system issues an error message and will not allow you to continue with this transaction until the error is resolved.

Error message extract from SAP system. Copyright SAP SE.

Smart SAP Assistant

• What is the cause and solution for SAP error message RY627 - Correlation matrix has negativ definition; VaRC calculation prevented ?

  The SAP error message RY627, which states "Correlation matrix has negative definition; VaRC calculation prevented," typically occurs in the context of Value-at-Risk (VaR) calculations in SAP's Risk Management or Financial Services modules. This error indicates that the correlation matrix used in the VaR calculation has negative eigenvalues, which suggests that the matrix is not positive semi-definite. This can lead to issues in risk calculations, as a valid correlation matrix should only contain non-negative eigenvalues.
  Causes:
  
  Data Issues: The underlying data used to calculate the correlation matrix may contain errors, such as missing values, outliers, or incorrect data types.
  Model Specification: The model used to estimate the correlations may be incorrectly specified, leading to an invalid correlation matrix.
  Insufficient Data: There may not be enough historical data to accurately estimate the correlations, resulting in instability in the matrix.
  Market Conditions: Extreme market conditions or volatility can lead to unusual correlations that may not hold in a stable environment.
  
  Solutions:
  
  Check Data Quality: Review the input data for completeness and accuracy. Ensure that there are no missing values or outliers that could affect the correlation calculations.
  Recalculate Correlations: If the data is correct, try recalculating the correlation matrix. You may want to use a different method for calculating correlations (e.g., using a rolling window).
  Adjust Model Parameters: If you are using a specific model to estimate correlations, consider adjusting the parameters or using a different model that may provide a more stable correlation matrix.
  Increase Data Sample Size: If possible, increase the amount of historical data used for the calculations to improve the stability of the correlation estimates.
  Regularization Techniques: Consider applying regularization techniques to the correlation matrix to ensure it remains positive semi-definite. This can involve techniques like shrinkage or adding a small constant to the diagonal elements.
  Consult Documentation: Review SAP documentation or consult with SAP support for specific guidance related to your version and configuration of the software.
  
  Related Information:
  
  Eigenvalues: Understanding eigenvalues and eigenvectors can help in diagnosing issues with correlation matrices. A matrix is positive semi-definite if all its eigenvalues are non-negative.
  VaR Calculation Methods: Familiarize yourself with different methods of calculating VaR (historical simulation, variance-covariance, Monte Carlo simulation) to determine if a different approach might yield better results.
  SAP Notes: Check for any relevant SAP Notes or patches that may address known issues related to this error message.
  
  If the problem persists after trying these solutions, it may be beneficial to engage with SAP support or a consultant who specializes in SAP Risk Management for further assistance.