Questions tagged [pca]
The pca tag has no usage guidance.
104
questions
1
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0answers
75 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
votes
0answers
58 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
vote
1answer
130 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
votes
0answers
48 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
vote
0answers
60 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 ...
1
vote
0answers
37 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
votes
0answers
54 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
134 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
votes
1answer
62 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
136 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
votes
0answers
52 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
vote
0answers
60 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
29 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 ...
1
vote
1answer
508 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
159 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
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
votes
1answer
289 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
vote
0answers
79 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
303 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
70 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
847 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
621 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
203 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
192 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
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0answers
157 views
1
vote
1answer
88 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
231 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
245 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
69 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
705 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
244 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
828 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
323 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
258 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
731 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
78 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
450 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
648 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
405 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
209 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
735 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
710 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
297 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
556 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
60 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
539 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 ...
