IDEAS home Printed from https://ideas.repec.org/a/gam/jijfss/v5y2017i3p15-d105316.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7072/5/3/15/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7072/5/3/15/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Dong-Hee Kim & Hawoong Jeong, 2005. "Systematic analysis of group identification in stock markets," Papers physics/0503076, arXiv.org, revised Oct 2005.
    4. 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.
    5. 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.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Libin Yang & William Rea & and Alethea Rea, 2015. "Identifying Highly Correlated Stocks Using the Last Few Principal Components," Papers 1512.03537, arXiv.org.
    2. 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.
    3. Lončarski, Igor & Vidovič, Luka, 2019. "Sorting out the financials: Making economic sense out of statistical factors," Finance Research Letters, Elsevier, vol. 31(C), pages 110-118.
    4. Libin Yang & William Rea & Alethea Rea, 2015. "How much diversification potential is there in a single market? Evidence from the Australian Stock Exchange," Working Papers in Economics 15/07, University of Canterbury, Department of Economics and Finance.
    5. Nick James & Kevin Chin, 2021. "On the systemic nature of global inflation, its association with equity markets and financial portfolio implications," Papers 2111.11022, arXiv.org, revised Jan 2022.
    6. Gregory Bauer & Antonio Diez de los Rios, 2012. "An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks," Staff Working Papers 12-5, Bank of Canada.
    7. James, Nick & Menzies, Max & Gottwald, Georg A., 2022. "On financial market correlation structures and diversification benefits across and within equity sectors," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 604(C).
    8. James, Nick, 2021. "Dynamics, behaviours, and anomaly persistence in cryptocurrencies and equities surrounding COVID-19," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 570(C).
    9. Dahlquist, Magnus & Hasseltoft, Henrik, 2013. "International Bond Risk Premia," Journal of International Economics, Elsevier, vol. 90(1), pages 17-32.
    10. James, Nick & Menzies, Max & Chin, Kevin, 2022. "Economic state classification and portfolio optimisation with application to stagflationary environments," Chaos, Solitons & Fractals, Elsevier, vol. 164(C).
    11. Nick James & Max Menzies & Kevin Chin, 2022. "Economic state classification and portfolio optimisation with application to stagflationary environments," Papers 2203.15911, arXiv.org, revised Sep 2022.
    12. James, Nick & Chin, Kevin, 2022. "On the systemic nature of global inflation, its association with equity markets and financial portfolio implications," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 593(C).
    13. Juneja, Januj, 2012. "Common factors, principal components analysis, and the term structure of interest rates," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 48-56.
    14. Libin Yang & William Rea & Alethea Rea, 2017. "Impending Doom: The Loss of Diversification before a Crisis," IJFS, MDPI, vol. 5(4), pages 1-13, November.
    15. He, Hui & Locke, Peter, 2011. "Global trends in real risk free rates," Research in International Business and Finance, Elsevier, vol. 25(1), pages 53-63, January.
    16. Nick James & Max Menzies, 2023. "An exploration of the mathematical structure and behavioural biases of 21st century financial crises," Papers 2307.15402, arXiv.org, revised Sep 2023.
    17. Nick James, 2021. "Dynamics, behaviours, and anomaly persistence in cryptocurrencies and equities surrounding COVID-19," Papers 2101.00576, arXiv.org, revised Feb 2021.
    18. Nick James & Max Menzies, 2021. "Collective correlations, dynamics, and behavioural inconsistencies of the cryptocurrency market over time," Papers 2107.13926, arXiv.org, revised Dec 2021.
    19. Nick James, 2021. "Evolutionary correlation, regime switching, spectral dynamics and optimal trading strategies for cryptocurrencies and equities," Papers 2112.15321, arXiv.org, revised Mar 2022.
    20. Jesper Rangvid & Maik Schmeling & Andreas Schrimpf, 2009. "Global Asset Pricing: Is There a Role for Long-run Consumption Risk?," CREATES Research Papers 2009-57, Department of Economics and Business Economics, Aarhus University.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jijfss:v:5:y:2017:i:3:p:15-:d:105316. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.