Moment Component Analysis: An Illustration With International Stock Markets

57 Pages Posted: 21 May 2018

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Emmanuel Jurczenko

Glion Institute of Higher Education

Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2015

Abstract

It is well known that non-normality plays an important role in asset and risk management. However, handling a large number of assets has long been a challenge due to the curse of dimensionality. We describe a statistical technique, which we call Moment Component Analysis (MCA), that extends Principal Component Analysis (PCA) to higher moments such as skewness and kurtosis. This method allows us to identify factors that drive co-skewness and co-kurtosis across assets. We illustrate MCA using 44 international stock markets sampled at weekly frequency from 1994 to 2014. We find that both the co-skewness and the co-kurtosis structures can be summarized with a small number of factors. Using a rolling window approach, we show that these co-moments convey useful information about market returns, complementary to the information extracted from a standard PCA.

Keywords: PCA, Skewness, Kurtosis, Portfolio Analysis, Tensor, Random Matrix Theory

JEL Classification: G11, G15, C51

Suggested Citation

Jondeau, Eric and Jurczenko, Emmanuel and Rockinger, Georg Michael, Moment Component Analysis: An Illustration With International Stock Markets (January 1, 2015). Available at SSRN: https://ssrn.com/abstract=3175766 or http://dx.doi.org/10.2139/ssrn.3175766

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Emmanuel Jurczenko

Glion Institute of Higher Education ( email )

Route de Glion 111
Montreux, 1823
Switzerland

Georg Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
+41 21 728 3348 (Phone)
+41+21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/mrockinger

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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