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

Libin Yang, William Rea and Alethea Rea
Additional contact information
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

IJFS, 2017, vol. 5, issue 3, 1-12

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.

Keywords: principal component analysis; stock correlation; diversification; stock portfolios; ASX 200 (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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