Financial Applications of the Mahalanobis Distance

Abstract

We describe existing and potential applications of the Mahalanobis distance in fi⬚nance. After a short motivation and a discussion of important properties of this distance measure, we classify its applications in fi⬚nance according to the nature and source of the input parameters used. Examples illustrate the usefulness of the Mahalanobis distance for ⬚financial market participants.