Driving Factors During the 2007-2009 Credit Crisis

Abstract

This article focuses on investigating the temporal evolution of four asset classes - equity (S&P 500 Index), bond (JPM emerging markets bond Index), hedge fund (HFRI fund weighted composite index non-investable) and commodity (S&P GSCI commodity Index) using principal component analysis (PCA). PCA transforms a number of correlated time-series into a smaller number of uncorrelated time-series. We show that before the 2007-2009 credit crisis, the market was driven by commodities only, whereas, during the credit crisis (2007-2009) and in the years after (2010-2012), equities and commodities drove the market.

Keywords: Principal component analysis, credit crisis