Random selection of factors preserves the correlation structure in a linear factor model to a high degree

Antti J. Tanskanen, Jani Lukkarinen and Kari Vatanen

Papers from arXiv.org

Abstract: In a very high-dimensional vector space, two randomly-chosen vectors are almost orthogonal with high probability. Starting from this observation, we develop a statistical factor model, the random factor model, in which factors are chosen at random based on the random projection method. Randomness of factors has the consequence that covariance matrix is well preserved in a linear factor representation. It also enables derivation of probabilistic bounds for the accuracy of the random factor representation of time-series, their cross-correlations and covariances. As an application, we analyze reproduction of time-series and their cross-correlation coefficients in the well-diversified Russell 3,000 equity index.

Date: 2016-04, Revised 2018-12
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-fmk
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Published in PLoS ONE (2018) 13(12): e0206551

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