Questions tagged [pca]

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PCA on levels or returns, and standardized or not?

When you run PCA on some financial assets, let’s say stocks, do you calculate covariance on levels, standardized levels, returns or standardized returns? I’ve seen several papers and posts that ...
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1 answer
163 views

Why cant I use PCA to find all stock factors? [closed]

Why cant I run all the stocks in the stock market thru a PCA model, and use the resulting principal components to create a factor model to price stocks and then buy stocks under priced and short ...
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67 views

Can't reproduce cumulative returns from first principal components of stock returns

The question I have is with regards to the first factor that is produced by a PCA on stock returns. That is, when I call ...
-1 votes
1 answer
222 views

Yield curve PCA: levels or daily moves?

I have tried using both yield curve levels as well as daily moves (absolute change) while doing PCA. Using both types of input/dataset gives me roughly the same shape in terms of principal components ...
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52 views

FX weights and P&L

How to correctly express basket of currencies in and index, such that P&L would align? Assume our index is 20% EURUSD and 80% GBPUSD and rates are 1.10 and 1.31 for T1 and 1.05 and 1.35 for T2. On ...
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1 answer
283 views

Principal component analysis on a yield curve

When conducting principal component analysis on the yield curve, PC1 = constant (level shift), PC2 = Slope, PC3 = Curvature. How do you interpret PC>3, e.g. PC 4?
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PCA on portfolio depending on multiple time series

There is extensive documentation about PCA on specific time series (for example the UK yield curve). When you have a portfolio which only depends on the change of the UK yield curve then a PCA on the ...
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2 votes
3 answers
395 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 ...
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1 answer
278 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 ...
2 votes
1 answer
134 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 vote
0 answers
97 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 ...
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4 votes
0 answers
101 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. ...
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1 vote
1 answer
390 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 ...
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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 ...
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1 vote
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79 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
0 answers
74 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 ...
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67 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 ...
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1 vote
2 answers
166 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 ...
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1 answer
125 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
1 answer
257 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 ...
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0 answers
70 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
0 answers
80 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
1 answer
1k 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 ...
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-1 votes
1 answer
277 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
0 answers
51 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
1 answer
397 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 ...
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1 vote
0 answers
97 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
1 answer
771 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
0 answers
95 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 ...
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2 votes
1 answer
2k 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 ...
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3 votes
2 answers
1k 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 ...
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1 answer
240 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 ...
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1 answer
252 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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1 vote
0 answers
210 views

pca for yield curve

I used Principe component analysis on yield curve data this was the result ...
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1 vote
1 answer
147 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
1 answer
271 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. ...
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5 votes
3 answers
298 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 ...
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1 vote
0 answers
83 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 ...
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1 vote
0 answers
904 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; ...
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0 votes
1 answer
285 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 ...
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3 votes
3 answers
1k 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
0 answers
441 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
1 answer
334 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 ...
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3 votes
1 answer
1k 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
1 answer
106 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
2 answers
685 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 ...
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2 votes
2 answers
770 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 ...
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1 vote
1 answer
516 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 ...
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-1 votes
2 answers
8k 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
2 answers
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, ...
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