Scaled PCA: A new approach to dimension reduction

• Main Authors: HUANG, Dashan, JIANG, Fuwei, TONG, Guoshi, ZHOU, Guofu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Bond Return Predictability; Real Time Macro Data; Vintage; PCA; Big Data; Machine Learning; Corporate Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6216; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7215/viewcontent/SSRN_id3358911.pdf
• Institution: Singapore Management University

The notion that bond risk premium varies with business cycles is challenged once real time macro data are used. In this paper, we argue that the macro factors extracted by using the standard PCA are not the most relevant for forecasting bond risk premium, because the PCA factors are designed to expl...