# Questions tagged [pca]

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### Explanation or implementation of Ledoit-Wolf estimator (without math packages)

I have calculated weights of selected assets in a market-neutral portfolio (presumably with min variance) using PCA and simple data covariance matrix. The question is : It is obvious that Cov Matrix ...
165 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)? ...
168 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 ...
456 views

### How replicate data using PCA

I have a set of date covering petrol prices. My example has two columns where each row represents a sequential date. ...
507 views

### PCA Variances and Principal Portfolio Variances

In Meucci's paper called "Managing Diversification" he mentions that: "Indeed, the eigenvalues A correspond to the variances of these uncorrelated portfolios" I tried to replicate it but found they ...
126 views

### Estimating two normal random numbers with one equation

Subtitle: Estimating the correlation of the shocks driving two commodities in two multi-factor models I am fitting two 2-factor models to electricity and gas futures, respectively. In order to ...
84 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 ...
184 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. ...
171 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 ...
68 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 ...
302 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 ...
194 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 ...
68 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 ...
141 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 ...
58 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 ...
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 ...
77 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 ...
146 views

### pca for yield curve

I used Principe component analysis on yield curve data this was the result ...
64 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 ...
600 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; ...
547 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 ...
53 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 ...
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 ...
25 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 ...
30 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 ...
50 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. ...
167 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, ...
41 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 ...
593 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 ...