Can PCA Structure Changes Indicate that it is Time to Trade?

Libin Yang, William Rea and Alethea Rea

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: We present some insights into the market and group components of the ASX200 based on a Principal Components Analysis (PCA). We firstly use biplots to identify which components should be considered market or group components. In our application this was component one for the market and components two to ten for the groups. We then investigated if changes in the structure of component two could be used in portfolio management. Our findings indicate that altering a portfolio structure based on changes in principal component structures are too short lived and involve too high transactions costs to be of use to a portfolio manager.

Keywords: Principal component analysis; stock selection; diversification; stock portfolios (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2015-06-22
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:15/13

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