Questions tagged [pca]
The pca tag has no usage guidance.
107
questions
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2answers
66 views
Attribute P&L to PCA vectors (swaps)
I have a daily US swaps data here for 2020 https://easyupload.io/yh4rnd . I have run PCA on standardized data and got PCA matrix (and basic statistics):
I also have such hypothetical portfolio that ...
0
votes
1answer
129 views
Principal Component Analysis for attributing yield curve changes
I have calculated the Principal components using daily yield curve changes. After calculating these components, i noticed that 98% of the return can be attributed to the first 3 components.
How do i ...
0
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0answers
61 views
Why does the 2nd Principle Component of a portfolio explain lots of variance in the data but has a low R^2 to portfolio?
I have used QQQ (nasday etf)holdings and weights data in a PCA model to see what components drive the daily returns of QQQ. What I found was PCA 1 explains 52% of the variance and PCA 2 explains 19% ...
1
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1answer
71 views
PCA analysis within Private Credit
A very broad question but nevertheless a important and difficult one.
Within private markets (Private Equity funds, infrastructure funds and private credit funds) how should one do a risk-based PCA ...
1
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0answers
81 views
factor hedging erodes portfolio alpha
I am hedging a long-short equity portfolio for statistical factors, and finding an improvement in sharpe but not surprisingly an erosion of portfolio alpha (ex ante and ex post). No one factor is ...
4
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0answers
63 views
Implementing Hierarchical PCA for financial time series in R
I would like to implement the method "Hierarchical PCA", as described in the following paper and compare it to a "standard" PCA. I like to do this in R
AVELLANEDA, Marco. ...
1
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1answer
185 views
How to extract normalised portfolio weights from PCA, when the eigenvector has negative elements?
Most of the examples of using PCA of asset returns to construct an eigen portfolio seem to tend to focus on equities, which tend to all be positively correlated. As such I usually see normalised (such ...
0
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0answers
60 views
Terminology - are each of the eigenvectors of a PCA themselves called an "eigen portfolio"
Sorry, I suspect this is rather trivial but just want to confirm that, given a portfolio constructed of n assets, each of the n ...
1
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0answers
65 views
How to extract informative value from correlations of assets? Subadditivity of correlation calculation an issue
I was reading Nassim Taleb's Paper: Fooled by Correlation and found it very informative. I had always struggled with finding value in correlation in Finance, especially seeing a lot of bad ...
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0answers
51 views
How to use PCA to find best portfolio replication
I have an exposure to 3 products. I have another 12 tradable products that I can use for hedging myself. I have the correlation matrix between the 15 (12+3) products.
How can I use PCA to find the ...
0
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0answers
57 views
Choose the best combination of 5 stocks from 15 stocks using PCA
I am working on a project to choose the perfect combination of 5 stocks from a total of 15 stocks to get the "highest gains". Here's the approach I plan to use.
Run a loop for all ...
1
vote
2answers
137 views
Pca on multidimensional data
My data has stock returns over n periods for x stocks and m factor exposures for each stock ( ex: value, momentum) for n periods(output of regressions ) . Can I club this data together and then ...
0
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1answer
66 views
PCA on returns gives negative loadings on market short
I have run a PCA on some returns to get a set of factors. All is good except that the first PC seems to be the short of the market, it has a correlation of -0.9 with the S&P500 but all the ...
1
vote
1answer
173 views
PCA and K-means clustering on returns
I am running a PCA on a set of returns and I would like to cluster the results of the output to group stocks that have similar factor exposures.
However when I run the PCA on the covariance of the ...
0
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0answers
55 views
First Principal Component Large Volatility
I am conducting PCA on several return series of funds and am finding that when I look at the first principal component the values are huge and this the volatility is also enormous relative to the ...
1
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0answers
62 views
PCA on covariance matrix with weights on the columns?
I'm reading two papers by Mark Kritzman on two indicators (turbulence proxied by the Mahalanobis distance and absorption ratio which is basically the ratio of the variance captured by the top 20% PCA ...
1
vote
1answer
643 views
Factor investing and PCA
I'm struggling to understand how Principal Component Analysis (PCA) is used in Factor Models of returns. For example, in the JPMorgan paper (p.19) the authors write:
In a multi asset portfolio, factor ...
-1
votes
1answer
188 views
Why is PCA/ML not used frequently in trading?
I'm curious why things like PCA/ML aren't use frequently in trading? Is there an underlying philosophy that prevent this? What I was thinking, was that if PCA worked for making money, then everyone ...
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0answers
38 views
Some questions to canonical correlations between principle components and asset pricing factors using R
I have done a asympotical principle component analysis (APCA), using eigen() in R, of the covariance matrix of a global dataset of excess returns.
I took the ...
3
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1answer
313 views
how to construct a diversified portfolio based on correlation
I have a porfolio of indexes and I built up a python model based on spearman correlation (I used a spearman and not a pearson because, after running some test on outliers and normality ...
1
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0answers
84 views
Why doesn't the first principal component maximize the standard deviation of returns
I am trying to apply PCA to portfolio of securities. My understanding is that the first principal component can be used to evaluate weights for portfolio of maximum variance and each next principal ...
3
votes
1answer
440 views
Bond Hedging: PCA and regression based hedge ratios
This is my first question and I would very much appreciate any help.
For a project I am trying to compare different hedging techniques for hedging a long portfolio of bonds.
I have a history of ...
2
votes
0answers
76 views
machine-learning method to predict PCA weights
I have been using certain linear-regression to extract the PCA (top 3) weights relating to a certain data-set.
I was wondering, instead of using linear-regression to generate the weights, I can use ...
2
votes
1answer
1k views
Hedging a trade for PCA component neutrality
Suppose I am given a set of financial instruments, e.g. {1Y, 2Y, ..., 30Y} interest rate swaps or {Barclays, Lloyds, .. } FTSE100 companies. It doesn't matter which so let's go with IRS.
I have ...
2
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2answers
711 views
PCA and risk bucketing
I have a portfolio of bonds and I have calculated their PV01 per risk bucket. The relevant buckets are 1m,2m,...,1y,2y,...30y; a total of 40 buckets.
I also run a PCA and have identified the three ...
0
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1answer
207 views
INTERPRETING PCA ANALYSIS
I am having little trouble figuring our which variables are the most important when I am using PCA .
What I am trying to do is see which variables explain the most variance when it comes to stock ...
0
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1answer
207 views
PCA FOR STOCK PICKING
lets say I am an equity analyst and I want to figure out what fundamental metrics I should use when I am analyzing an industry , I can use pca on a bunch of stocks in an industry using their ...
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0answers
168 views
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1answer
104 views
PCA in PRIIPs regulation for simple floating interest rate
From the Q&A on the PRIIPs KID:
4. The principal component analysis of Annex II, Point 23 ensures the consistent simulation of curves. Is it mandatory to use this method also for PRIIPs that ...
2
votes
1answer
237 views
PCA on a portfolio of spot and forward contracts
I have a portfolio of spot and FX forwards on various currencies all based to AUD. I need to able to quantify how the changes in amount, tilt and curvature of the AUD curve would impact my p/l.
...
5
votes
3answers
255 views
PCA: How to select a smaller set of the original features that best represent first PC with minimal contribution to the other PCs
I have performed PCA on a covariance matrix.
I have 24 original features and subject to some constraints over which features are used i would like to chose the combination of features that best ...
1
vote
0answers
72 views
Predicting stock returns using principal components of macroeconomic variables
I'm trying to detect return predictability by regressing stock returns on the first couple of principal components of a set of macroeconomic variables. I'm doing this for different stock styles such ...
1
vote
0answers
766 views
PCA predicted yield curve moves do not match (closely) realized yield curve moves
I have a need to set-up a methodology to decompose the x-day yield curve moves into its underlying (3) PCAs.
Specifically, for an example, to generate the 1-day moves in the EUR-swap yield curve; ...
0
votes
1answer
252 views
stress testing zero coupon yield curve
i'm currently trying to stress test the zero coupon yield curve using daily observations from 2003 to 2019.
Each Zero coupon yield curve originate from an actuarial curve with 37 tenors that range ...
3
votes
3answers
917 views
PCA for Risk bucketing
I'm working on a project to justify the use the certain tenors (2y, 5y, 10y, 30y) for risk bucketing. I'm a little stuck after calculating the principal components. Just to describe my approach-
a) ...
2
votes
0answers
348 views
How to interpret DV01 in terms of PCA equivalent?
I have computed the PCs for daily changes in the UST yield curve over the last 5 years using the covariance matrix and can explain 94% of the variance using the first two components, which is good ...
7
votes
1answer
268 views
Principal Components Analysis on overlapping contracts
I am conducting several PCAs on the gas forward curves (months, quarters, seasons, calendars) for hedging purposes which give me some rather reasonable and stable results.
However, these contracts ...
3
votes
1answer
797 views
statistical arbitrage using PCA
While reading the paper Statistical Arbitrage in the U.S. Equities Market
by Marco Avellaneda and Jeong-Hyun Lee on statistical arbitrage using PCA
I realized that the author sums the residuals of ...
1
vote
1answer
82 views
Do you use seasonally or non seasonally adjusted index in analysis
I am constructing an inflation factor that includes the gdp deflator, the PPI for finished goods, and a spot commodity index.
Do I uses seasonally or nonseasonally adjusted historical series?
Thank ...
2
votes
2answers
478 views
Construct a butterfly interest rate portfolio to eliminate PCA exposures
I have data from 2012 to 2016 for interest rates whose term range from 2 month to 30 years, a total of 10 Principal components can be calculated.
Then I want to construct a portfolio, $$WFLY = w_1 *5Y ...
2
votes
2answers
672 views
Reconstruct yield curve from principal components
I am currently building a model which aim is to model shocks to the yield curve (i.e. 25bps hike in the short rate).
Currently I am looking at a swap curve from which I derive the PCs. Assessing the ...
1
vote
1answer
429 views
Interpretation of PCA for commodity futures
I've done some PCA analysis of a portfolio consisting of futures on certain commodities. However, I am unsure of how to interpret the output as most of the information found online deals with fixed ...
-1
votes
2answers
6k views
Why is my Covariance matrix not positive definite?
I'm trying to do PCA on historic forward rates. I'm using forward rates from the Bank of England going from Jan 2015 through end of May 2018. I calculate the differences in the rates from one day to ...
1
vote
2answers
1k views
Principal component analysis for yield curve
I have Treasury yield data across 11 maturities for past 1 year. I have used a code in MATLAB for PCA on change in yield curve. Now, I have covariance matrix of daily/monthly yield curve changes, ...
2
votes
0answers
215 views
Using PCA to identify proxies for highly illiquid assets?
Was wondering if anyone had any literature to share on the use of PCA to identify proxies for highly illiquid assets?
Say for example I have sold an option on stock A, an index constituent, and would ...
2
votes
1answer
759 views
Constructing a stock market index using PCA
Let's say that I've got a final component and its score derived from n number of stock returns (time-series data). I want to construct a stock market index using this component (having negative and ...
2
votes
1answer
746 views
Using PCA to predict Stock Prices
I would like to model an index e.g. FTSE 100. I have a list of all companies that make up the index and their stock values (daily high, low, volume, close values). In total, this time series data has ...
0
votes
1answer
310 views
PRIIP Category 3 Curves
Good evening,
I've tried searching similar posts, but most are unanswered or in a more advanced step than what I'm trying to achieve.
I've managed to do the boostrap method for spot prices ...
1
vote
0answers
566 views
PRIIPs category 3 curve dependent products (PCA)
My question is regarding the PRIIPs regulation, specificaly about category 3 products that depend on yield curves and require PCA. The product in question is index-linked product, which means that the ...
1
vote
1answer
1k views
principal component analysis on non stationary data
I read that since stock prices are non-stationary it does not make sense to take their covariance. So I took the log returns of stocks, computed covariance matrix, took the top few eigen vectors that ...
