Infantino’s PCA Model, 2010

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Contents

  1. References
  2. Code
This model, from a large group of stocks e.g., S&P 500, computes, using Principal Component Analysis, the common factors that drive stock returns and filters out noises. We can then estimate the short term expected returns for each individual stock, hence a trading decision.

Moreover, the model proposes a way to use intraday volatility to estimate which of the two regimes we are in –

  • mean-reversion, or
  • momentum

Combining the estimated expected returns with the regime indicator, we do mean-reversion when the intraday volatility is small, and trend following when the intraday volatility is big.

 

References

Code