- Joined
- 2/21/10
- Messages
- 50
- Points
- 18
Hello everyone!
I have a question regarding the choice between the Principal Component Analysis and Factor Model methods. PCA's main focus is the diagonal terms in covariance matrix and FA model concentrates on off-diagonal terms. Everything in calculation of both model is clear and understandable but I know not which one to choose in multi-factor model.
If single index model is not sufficient in explaining return and volatility we have a choice to more factors which is done through these 2 main methods(PCA,FA). So my question is: which one is preferable over another and why?
Thank you
I have a question regarding the choice between the Principal Component Analysis and Factor Model methods. PCA's main focus is the diagonal terms in covariance matrix and FA model concentrates on off-diagonal terms. Everything in calculation of both model is clear and understandable but I know not which one to choose in multi-factor model.
If single index model is not sufficient in explaining return and volatility we have a choice to more factors which is done through these 2 main methods(PCA,FA). So my question is: which one is preferable over another and why?
Thank you