A Non-Normal Principal Components Model for Security Returns
20 Pages Posted: 6 May 2019
Date Written: February 21, 2019
We introduce a principal components model for securities' returns. The components are non-normal, exhibiting significant skewness and kurtosis. The model can explain a large proportion of the variance of the securities' returns with only one or two components. Third and higher-order components individually contribute so little that they can be considered to be noise terms.
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