Method evidence record
Principal Component Risk Factors
Risk Factor PCA is a dimension-reduction method that decomposes the return covariance matrix of many assets into a small set of orthogonal principal components interpreted as systematic risk factors. Litterman and Scheinkman (1991) used it to show that bond returns are driven by a few common factors, and Connor and Korajczyk (1988) developed the statistical-factor interpretation for the APT.
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Risk Factor PCA via Return Covariance Decomposition
Taxonomic method record · regression-model / finance
- Litterman, R. & Scheinkman, J. (1991). Common Factors Affecting Bond Returns. Journal of Fixed Income, 1(1), 54-61. · DOI 10.3905/jfi.1991.692347
- Connor, G. & Korajczyk, R. A. (1988). Risk and Return in an Equilibrium APT: Application of a New Test Methodology. Journal of Financial Economics, 21(2), 255-289. · DOI 10.1016/0304-405X(88)90062-1
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