A Non-Normal Principal Components Model for Security Returns

20 Pages Posted: 6 May 2019

See all articles by Sander Gerber

Sander Gerber

Hudson Bay Capital Management, LP

Babak Javid

Hudson Bay Capital Management, LP

Harry Markowitz

University of California at San Diego

Paul Sargen

Hudson Bay Capital Management, LP

David Starer

Stevens Institute of Technology

Date Written: February 21, 2019

Abstract

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.

Suggested Citation

Gerber, Sander and Javid, Babak and Markowitz, Harry and Sargen, Paul and Starer, David, A Non-Normal Principal Components Model for Security Returns (February 21, 2019). Available at SSRN: https://ssrn.com/abstract=3352062 or http://dx.doi.org/10.2139/ssrn.3352062

Sander Gerber

Hudson Bay Capital Management, LP ( email )

777 Third Avenue
New York, NY NY 10017
United States

Babak Javid

Hudson Bay Capital Management, LP ( email )

777 Third Avenue
New York, NY NY 10017
United States

Harry Markowitz

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
(858) 534-3383 (Phone)

Paul Sargen

Hudson Bay Capital Management, LP ( email )

777 Third Avenue
New York, NY NY 10017
United States

David Starer (Contact Author)

Stevens Institute of Technology

Castle Point on Hudson
Hoboken, NJ 07030
United States

HOME PAGE: http://personal.stevens.edu/~dstarer

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