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Financial Insights from the Last Few Components of a Stock Market PCA

Author

Listed:
  • Libin Yang

    (Department of Economics and Finance, University of Canterbury, Private Bag 4800, Christchurch 8140, New Zealand)

  • William Rea

    (Department of Economics and Finance, University of Canterbury, Private Bag 4800, Christchurch 8140, New Zealand)

  • Alethea Rea

    (Centre for Applied Statistics, University of Western Australia, 35 Stirling Hwy, Crawley 6009, Australia)

Abstract

We show that the last few components in the principal component analysis of the correlation matrix of a group of stocks may contain useful financial insights by identifying highly correlated pairs or larger groups of stocks. The results of this type of analysis can easily be included in the information an investor uses to manage an investment portfolio.

Suggested Citation

  • Libin Yang & William Rea & Alethea Rea, 2017. "Financial Insights from the Last Few Components of a Stock Market PCA," IJFS, MDPI, vol. 5(3), pages 1-12, July.
    • Handle: RePEc:gam:jijfss:v:5:y:2017:i:3:p:15-:d:105316
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    References listed on IDEAS

    as
    1. Libin Yang & William Rea & Alethea Rea, 2015. "Stock Selection with Principal Component Analysis," Working Papers in Economics 15/03, University of Canterbury, Department of Economics and Finance.
    2. Dong-Hee Kim & Hawoong Jeong, 2005. "Systematic analysis of group identification in stock markets," Papers physics/0503076, arXiv.org, revised Oct 2005.
    3. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
    4. Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2003. "Common factors in international bond returns," Other publications TiSEM 06a83942-b625-4d3c-808c-a, Tilburg University, School of Economics and Management.
    5. Perignon, Christophe & Smith, Daniel R. & Villa, Christophe, 2007. "Why common factors in international bond returns are not so common," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 284-304, March.
    6. Driessen, Joost & Melenberg, Bertrand & Nijman, Theo, 2003. "Common factors in international bond returns," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 629-656, October.
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    Cited by:

    1. Wang, Peiwen & Huang, Guanglin, 2024. "Measuring systemic risk contribution: A higher-order moment augmented approach," Finance Research Letters, Elsevier, vol. 59(C).
    2. Thomas A. Severini, 2022. "Some properties of portfolios constructed from principal components of asset returns," Annals of Finance, Springer, vol. 18(4), pages 457-483, December.

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