Hierarchical PCA and Applications to Portfolio Management

Hierarchical PCA and Applications to Portfolio Management

Abstract It is widely known that the common risk-factors derived from PCA beyond the first eigenportfolio are generally difficult to interpret and thus to use in practical portfolio management. We explore an alternative approach (HPCA) which makes strong use of the partition of the market into sectors. We show that this approach leads to no loss of information with respect to PCA in the case of equities (constituents of the S&P 500) and also that the associated common factors admit simple interpretations. The model can also be used in markets in which the sectors have asynchronous price information, such as single-name credit default swaps, generalizing the works of Cont and Kan (2011) and Ivanov (2016).

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Main Author: Avellaneda,Marco
Format: Digital revista
Language:English
Published: Instituto Mexicano de Ejecutivos de Finanzas A.C. 2020
Online Access:http://www.scielo.org.mx/scielo.php?script=sci_arttext&pid=S1665-53462020000100001
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spelling oai:scielo:S1665-534620200001000012020-07-01Hierarchical PCA and Applications to Portfolio ManagementAvellaneda,Marco C02 C65 G24 returns blocks PCA HPCA portfolio Abstract It is widely known that the common risk-factors derived from PCA beyond the first eigenportfolio are generally difficult to interpret and thus to use in practical portfolio management. We explore an alternative approach (HPCA) which makes strong use of the partition of the market into sectors. We show that this approach leads to no loss of information with respect to PCA in the case of equities (constituents of the S&P 500) and also that the associated common factors admit simple interpretations. The model can also be used in markets in which the sectors have asynchronous price information, such as single-name credit default swaps, generalizing the works of Cont and Kan (2011) and Ivanov (2016).info:eu-repo/semantics/openAccessInstituto Mexicano de Ejecutivos de Finanzas A.C.Revista mexicana de economía y finanzas v.15 n.1 20202020-03-01info:eu-repo/semantics/articletext/htmlhttp://www.scielo.org.mx/scielo.php?script=sci_arttext&pid=S1665-53462020000100001en10.21919/remef.v15i1.446
institution SCIELO
collection OJS
country México
countrycode MX
component Revista
access En linea
databasecode rev-scielo-mx
tag revista
region America del Norte
libraryname SciELO
language English
format Digital
author Avellaneda,Marco
spellingShingle Avellaneda,Marco
Hierarchical PCA and Applications to Portfolio Management
author_facet Avellaneda,Marco
author_sort Avellaneda,Marco
title Hierarchical PCA and Applications to Portfolio Management
title_short Hierarchical PCA and Applications to Portfolio Management
title_full Hierarchical PCA and Applications to Portfolio Management
title_fullStr Hierarchical PCA and Applications to Portfolio Management
title_full_unstemmed Hierarchical PCA and Applications to Portfolio Management
title_sort hierarchical pca and applications to portfolio management
description Abstract It is widely known that the common risk-factors derived from PCA beyond the first eigenportfolio are generally difficult to interpret and thus to use in practical portfolio management. We explore an alternative approach (HPCA) which makes strong use of the partition of the market into sectors. We show that this approach leads to no loss of information with respect to PCA in the case of equities (constituents of the S&P 500) and also that the associated common factors admit simple interpretations. The model can also be used in markets in which the sectors have asynchronous price information, such as single-name credit default swaps, generalizing the works of Cont and Kan (2011) and Ivanov (2016).
publisher Instituto Mexicano de Ejecutivos de Finanzas A.C.
publishDate 2020
url http://www.scielo.org.mx/scielo.php?script=sci_arttext&pid=S1665-53462020000100001
work_keys_str_mv AT avellanedamarco hierarchicalpcaandapplicationstoportfoliomanagement
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