Questions tagged [pca]

The tag has no usage guidance.

Filter by
Sorted by
Tagged with
1
vote
0answers
53 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 ...
0
votes
0answers
21 views

Is it possible to apply PCA to a time-series of covariances?

I understand that Principal Component Analysis (PCA) can be applied for cross-sectional as well as for time-series data. Nevertheless, I am trying to figure out if there is anything wrong with ...
0
votes
1answer
89 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 ...
0
votes
0answers
26 views

PCA on mixed types of returns

I'm looking for some resources on how to use the PCA technique in the case of mixed return types, i.e. lognormal (say for FX, equity indices) and normal (rates). The idea is to create a factor model ...
-1
votes
1answer
112 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 ...
1
vote
0answers
36 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
votes
1answer
104 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 ...
0
votes
0answers
47 views

Hedging Bond portfolio with Futures

I am working on a risk department. Our portfolio contains mostly some long German bond 15y and we tend to hedge it through BUXL and BOBL via PCA but our 15y key rate duration is not properly covered. ...
1
vote
0answers
73 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 ...
2
votes
0answers
96 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
63 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 ...
1
vote
1answer
364 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
votes
2answers
342 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
votes
1answer
186 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
votes
1answer
161 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 ...
1
vote
0answers
127 views

pca for yield curve

I used Principe component analysis on yield curve data this was the result ...
1
vote
1answer
71 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
209 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
223 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
63 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
455 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
227 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
516 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
271 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
202 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
555 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
60 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
345 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
520 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
344 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
4k 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
987 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
188 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
663 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
615 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
268 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
543 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 ...
2
votes
0answers
59 views

Covariance Matrix: Calculating Error [duplicate]

I have a sample covariance matrix that is non positive-semi definite (due to missing data points). I am looking at a number of techniques to 'fix' my covariance matrix and make it positive semi-...
0
votes
1answer
480 views

Portfolio Optimisation/Covariance Estimation on a large scale

When using Markowitz Portfolio Theory, e.g. for finding an optimal portfolio composition, one needs to have estimates of the returns, but most importantly of the covariance matrix. If our universe of ...
-2
votes
1answer
1k views

Forecasting next day return of a stock using PCA of index constituents

I am trying to predict the return of BN4.SI ( a singapore stock ) and part of Strait Times 30 component index using principal component Analysis. I have written my code in python. My Question is i ...
0
votes
1answer
496 views

KID PRIIPS regulation: PCA

According to KID/PRIIPS regulation in your opinion in which case should PCA (as from article 23) be used? Just for structured products and bond-related products or also in other cases? Do you have ...
2
votes
0answers
67 views

Reduced rank / matrix factorisation techniques and their uses in portfolio optimisation?

I am interested in reduced rank / matrix factorisation techniques and their uses across finance and portfolio optimisation. For example, PCA might be used to reduce the number of components you are ...
0
votes
0answers
159 views

PCA and constructing an index

Given a set of correlated securities and their corresponding closing prices, I am looking for a way to construct an index of these securities. When applying PCA to obtain the principal components, ...
2
votes
0answers
131 views

Why Regression should only be done on Non-Stationary data points?

I am working through a course on PCA and Factor analysis, where the example is to perform regression on stock prices, with an objective to predict the stock prices. The author claims, that we need to ...
1
vote
1answer
1k views

Applications of PCA to yield curve analysis

One of the applications of Principal Component Analysis in Finance is to analyse the shape of the yield curve. But what conclusions can be drawn exactly from performing this exercise? Does it help us ...
0
votes
1answer
138 views

Low-rank approximation techniques for portfolio optimisation

I am trying to understand how low-rank approximation techniques such as PCA, factor analysis, total least squares, orthogonal regression, etc could be used in portfolio optimisation. Say I have a ...
1
vote
1answer
172 views

Yield curve PCA vs real life frequency

The yield curve can be explained using a PCA, where the cumulative proportion explained for many practical purposes is high enough with three factors. For one set of data, used at https://www.r-...
3
votes
0answers
77 views

What is special about covariance estimation from statistical factor models?

If you were to compare the usual sample covariance estimate to a robust covariance estimate (such as MCD), you can say that the robust estimate is more tolerant to outliers in the data and will not be ...
1
vote
1answer
68 views

How do I test if my betas form a co-integrated vector?

I have identified a model using principal component regression where $Y_t$ is explained by 4 factors such as: $$Y_t = \beta_1 X_{1t} + \beta_2 X_{2t} + \beta_3 X_{3t} + \beta_4 X_{4t} + \epsilon_t$$ ...