Overcoming Market Noise: How PCA Method Transforms Trading Strategies and Risk Management.
Introduction The Principal Component Analysis (PCA) method was originally developed for processing multidimensional data. In financial markets, it helps to uncover hidden factors that influence the movement of diverse assets and assess their interrelationships. Within the context of trading strategy development, PCA transforms sets of covariant signals—such as logarithmic returns—into a few independent (orthogonal) components…