Example:

Let us consider X1 and X2 , two random variables which are non-normal and
correlated with a correlation coefficient ρX . What is the joint pdf fX (X1 , X2 )
?

Recall: Any given random variable can be converted to equivalent normal. So,
the one to one mapping tells

x1 ←→ z1 −→ FX1 (x1 ) = Φ(z1 )

x2 ←→ z2 −→ FX2 (x2 ) = Φ(z2 )
i.e.
−1
x1 = FX 1
[Φ(z1 )]
−1
x2 = FX 2
[Φ(z2 )]
Now, z1 and z2 are Standard Normal and also correlated with correlation coef-
ficient ρZ .
Again Recall: Two correlated Standard Normal variables can be uncorrelated
by eigen analysis.

Z = V U, Where U is uncorrelated Standard Normal.

= LU, by Cholesky Decomposition.
T
RZ = LL -Cholesky Decomposition.
 
1 ρZ
RZ =
ρZ 1
Therefore,     
z1 1 p 0 u1
=
z2 ρZ 1 − ρ2Z u2
Therefore,

z1 = u1
q
z2 = ρZ u1 + 1 − ρ2Z u2

Again, consider the mapping equation:

FX1 (x1 ) = Φ(z1 )

Differentiating both side,

fX1 (x1 )dx1 = φ(z1 )dz1

Also,
fX2 (x2 )dx2 = φ(z2 )dz2

1
Therefore,
fX1 (x1 )dx1
dz1 =
φ(z1 )
fX2 (x2 )dx2
dz2 =
φ(z2 )

V ar(xi , xj ) = E[(xi − µi )(xj − µj )]

Z Z
= (xi − µi )(xj − µj )fX (xi , xj )dxi dxj

E[(xi − µi )(xj − µj )]
ρ12 =
σ1 σ2
1  
= E[x1 x2 ] − µ1 µ2
σ1 σ2
Z Z
E[x1 , x2 ] = x1 x2 fX (x1 , x2 )dx1 dx2
Z Z
−1 −1
= FX 1
[Φ(z1 )]FX2
[Φ(z2 )]φ(z1 , z2 .ρz )dz1 dz2
Z Z
−1 −1 fX1 (x1 ) fX2 (x2 )
= FX [Φ(z1 )]FX [Φ(z2 )]φ(z1 , z2 .ρz ) dx1 dx2
1 2
φ(z1 ) φ(z2 )

φ(z1 , z2 , ρz )
fX1 X2 (x1 , x2 ) = fX1 (x1 )fX2 (x2 ) -Nataf Model
φ(z1 )φ(z2 )
SO, to evaluate ρz , we need one more transformation:
Z = LU
 
1 1
φ(u1 , u2 ) = exp − (u21 + u22 )
2π 2
Z Z
−1 −1
E[x1 , x2 ] = FX 1
[Φ(z1 )]FX2
[Φ(z2 )]φ(z1 , z2 .ρz )dz1 dz2
Z Z
−1 −1
p
= FX 1
[Φ(u1 )]FX 2
[Φ(ρZ u1 + 1 − ρ2z u2 )]φ(u1 , u2 )du1 du2
Z Z  
1 −1 −1
p
2 u )] exp
1 2 2
= FX [Φ(u 1 )]F [Φ(ρ u
z 1 + 1 − ρz 2 − (u + u ) du1 du2
2π 1 X2
2 1 2

Z Z  
µ1 µ2 1 1 2
q
−1 −1 2 2
⇒ ρ12 =− + FX1 [Φ(u1 )]FX2 [Φ(ρZ u1 + 1 − ρZ u2 )] exp − (u1 + u2 ) du1 du2
σ1 σ2 2πσ1 σ2 2
Z Z
µ1 µ2 1
q
−1 −1
=− + FX [Φ(u1 )]FX [Φ(ρZ u1 + 1 − ρ2Z u2 )]φ(u1 , u2 )du1 du2
σ1 σ2 σ1 σ2 1 2

= G(ρZ )

2
Special case: If one of xi and xj is normal.

Let xj −→ N (0, 1) i.e. xj is Standard Normal.

Therefore,
q
xj = Φ−1
j [Φ(ρZ ui + 1 − ρ2Z uj )]
q
= ρZ ui + 1 − ρ2Z uj

Therefore,
Z Z  
1 1 2
q
−1 2 2
ρX = Fi [Φ(ui )](ρZ ui + 1 − ρZ uj ) exp − (ui + uj ) dui duj
2πσi 2
Z Z  
1 1
= Fi−1 [Φ(ui )]ρZ ui exp − (u2i + u2j ) dui duj
2πσi 2
Z Z  
1 1 2
q
−1 2 2
+ Fi [Φ(ui )] 1 − ρZ uj exp − (ui + uj ) dui duj
2πσi 2
Z Z
1 1 2 1 2
= Fi−1 [Φ(ui )]ui e− 2 ui dui .z e− 2 uj duj
2πσi
Z Z
1
q
1 2 1 2
+ Fi−1 [Φ(ui )]e− 2 ui dui . 1 − ρ2Z uj e− 2 uj duj
2πσi
Z
1 1 2
=√ Fi−1 [Φ(ui )]ui e− 2 ui dui .ρz
2πσi

ρX = aρZ -If one is normal, then G(.) is a liner function