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Questions tagged [pca]

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2
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0answers
81 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 ...
6
votes
1answer
90 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
173 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 ...
0
votes
1answer
25 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
1answer
82 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
115 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 ...
0
votes
1answer
141 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
278 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
369 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
111 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
351 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 ...
0
votes
0answers
61 views

PCA Variance Explained on Out-of-sample Data

Currently doing some PCA analysis on yield curves. In order to test the stability of the eigenvectors, would like to train my model over a window of time (ex: 2002-2007) and then calculate the ...
1
vote
1answer
332 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 ...
-1
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0answers
178 views

log return or simple return in PCA(statistical factor) analysis?

What are pros and cons of using simple versus log returns in PCA?
0
votes
1answer
206 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
456 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
387 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
50 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
242 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 ...
-3
votes
1answer
626 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
431 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 ...
3
votes
0answers
59 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
100 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, ...
3
votes
0answers
96 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
642 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
0answers
59 views

PCA: FTSE100 or any other index

I am relatively new and want to do a Principle Component Analysis (PCA) of the FTSE100 or any other index. What's the best way to downloaded the constituent parts of the index so that I can perform a ...
0
votes
1answer
98 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 ...
0
votes
1answer
117 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-...
2
votes
0answers
54 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
63 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: $$Y_t = \beta_1 X_{1t} + \beta_2 X_{2t} + \beta_3 X_{3t} + \beta_4 X_{4t} + \epsilon_t$$ ...
4
votes
1answer
260 views

Interpreting Eigenvalues of Co-variance Matrix

Im working on market reaction to events and I'm using the co-variance matrix to do this. In this paper the author writes It has been known for some time that the largest eigenvalue (λ1) contains ...
4
votes
0answers
145 views

VAR FPCA analysis paper replication

I've been trying to replicate the following publication: CONSISTENT FUNCTIONAL PCA FOR FINANCIAL TIME-SERIES, Sebastian Jaimungal, Eddie K. H. Ng, 2007 but I havent been able to get the same results ...
5
votes
2answers
412 views

PCA for stand alone equity VaR

I am trying to compute equity VaR, forex VaR and total VaR on an international portfolio (10 stocks x 4 countries). Since I am not interested in the risk disaggregation among diffrent countries I was ...
5
votes
0answers
140 views

Interplay of statistical factors (PCA) and market factors (value, momentum, low vol, …)

Is there any research done on the interplay between statistical factors (as a result of principle component analysis PCA) and the market factors (especially value, size, low vol, momentum, quality)? ...
1
vote
1answer
746 views

Calculating PCA hedge ratio for 3-leg spread

I'm wondering how can I find PCA hedge ratio for a 3-leg spread? I've taken the simple steps laid out in here. I've taken some treasury futures data for 2yr,5yr,10yr and ran the PCA. The first ...
8
votes
4answers
1k views

Hedge Fund risk management on a daily basis

Since Hedge Funds/Fund of Funds report on a monthly basis usually within 10 days after the month end, monitoring and managing (hedging) potential risks is quite a difficult task. Having done some ...
1
vote
1answer
142 views

Rebucketing Risk using PCA/other methods

was working on a project and could use some help. New to the community and looking fwd to being an active part of it. My question is, let's say we have a vector of securities V, and it trades with ...
3
votes
1answer
598 views

Weights Blowing up in PCA

I'm using daily settlement data to get yield levels for a couple of products. From this data I am doing PCA on a rolling collection of the yield levels. I have been using sci-kit learn's PCA function, ...
0
votes
0answers
40 views

Is there a considered floor for variation the 1st principal component must explain?

I am wondering if there is a considered floor to the percentage variation the 1st principal component must explain in general for PCA - ie. any lower and it is not worth doing PCA at all? Is the floor ...
2
votes
1answer
275 views

Orthogonal Regression/PCA

I am doing orthogonal regression. My X matrix consists of returns on a broad market index, value index, growth index, a few sectors,.....(my Y is the returns on an equity fund) I am regressing the Y ...
1
vote
2answers
328 views

Reproducing levels when PCA has been done on changes

I want to use PCA for rich/cheap analysis of interest rates. For this I did the PCA on the time series of daily difference in interest rates, which is stationary. I cant do pca on levels, as they are ...
3
votes
0answers
170 views

Which kind of normalization to prefer before PCA (generic solution for any factor analysis)

I have financial assets with totally different volatilities, thus I must standardize them before PCA, otherwise, assets with high variance may be considered as principle components, which is wrong. ...
1
vote
1answer
113 views

Why normalize only data for CDSs for PCA?

I'm reading a Credit Suisse Research Report on PCA. The report says that to preprocess the data, you should "Centre data (and normalize when considering CDS data)." Why would you only normalize ...
11
votes
1answer
597 views

The danger of using Principal Component Analysis (PCA) in Robust Optimization problems

I have received a reviewer's comment on a paper which applies PCA to reduce the size of a problem and the application is in the robust optimization field. The reviewer implies that "In robust ...
0
votes
1answer
822 views

PCA on term structure of interest rates

Interest rate time series seems to be non-stationary whenever test is performed But covariance or correlation matrix is derived from term structure time series which are non stationary and later PCA ...
4
votes
2answers
947 views

Factor Model - Minimum Variance Portfolio [Complete Proof]

Can someone check my proof? I think there is something not quite right. I have found limited resources online for this as well so I think it might benefit others to get this on the internet. Assume ...
4
votes
1answer
2k views

Statistical arbitrage using eigen portfolios

I was trying to understand below paper https://www.math.nyu.edu/faculty/avellane/AvellanedaLeeStatArb071108.pdf Page 20 explains about "Entering a trade". I wan't to know clearly what it means to ...
0
votes
0answers
501 views

How to reduce fx currency pairs ? PCA or other tools?

I have 19 currency pairs like USD.AUD, USD.CAD, etc. Also 82 cross currency pairs like AUD.CAD, EUR.AUD,EUR.CAD etc. When I look to their graphs, most look similar, so I want to reduce number of pair ...
7
votes
2answers
682 views

Looking for Research Paper on Creation of Currency Baskets

I came across a paper, not sure it originated from academia or a blog or such, that reported on applying principal components to build currency baskets from a set of individual currency pairs and to ...
4
votes
2answers
987 views

Some clarifications on eigenvectors and eigenvalues from PCA

Could somebody tell me whether suggestions in bold true or not? Q # 1: http://www.math.nyu.edu/faculty/avellane/AvellanedaLeeStatArb071108.pdf ...