Multivariate Analysis HW 0421 PCA

國企碩一 99212501 陳韋翔

1 Motivation
Everyone knows that stock markets in a certain geographic region may have connection with other countries in the same region. Therefore, I choose six countries to verify the concept that I mentioned. These countries all belong to Asia, a rapidly growing area in the world, including Hong Kong(hk), Japan(jp), Korea(kr), Philippines(ph), Singapore(sg) and Taiwan(tw).


Data Description
• Data Source: Dow Jones Online Database • Period: start: 1993/1/7, end: 2010/12/30 • Data Property: – Six Asia countries are as follows: Hong Kong, Japan, Korea, Philippines, Singapore, Taiwan – Weekly aggregate index return rate = ln(close pricet ) − ln(close pricet−1 ) • Observations: 937


Covariance Matrix

First, values in covariance matrix are adjusted to six decimal places for simplicity. The biggest value in table 1 is the covariance of the return rate of Korea, which means that the return rate of Korea has a larger fluctuation than other countries in sample. According to the result we got, it is reasonable that Korea is going to be a key role in the following context.


hk hk 0.001261 jp 0.000397 kr 0.000886 ph 0.000666 sg 0.000799 tw 0.000716

Table 1: Covariance Matrix jp kr ph



0.000838 0.000627 0.002913 0.000338 0.000610 0.001765 0.000418 0.000815 0.000753 0.001086 0.000381 0.000868 0.000585 0.000689 0.001595 Table 2: Correlation Matrix kr ph

hk jp kr ph sg tw

hk 1.0000000 0.3860739 0.4625107 0.4462651 0.6828179 0.5050966




1.0000000 0.4012562 1.0000000 0.2782148 0.2689110 1.0000000 0.4379678 0.4581428 0.5437817 1.0000000 0.3292490 0.4028976 0.3487346 0.5236347 1.0000000


Correlation Matrix

In table 2, only one correlation coefficient exceeds 0.6. It seems that there is a strong relationship between Hong Kong and Singapore. These two countries have some similar characteristics, for instance, a small population size, the type of city, and a society influenced deeply by Chinese culture. We could assume that investors in these two countries may focus on similar events and respond to market similarly.


Eigenvalues and Eigenvectors
Table 3: Eigenvalues and Eigenvectors Eigenvalue Proportion 0.005076 0.536607 0.001698 0.179550 0.001039 0.109874 0.000711 0.075137 0.000592 0.062512 0.000344 0.036312

We calculate the eigenvalue and the proportion each country which ordered in table 1. Obviously, the cumulative proportion of first two countries exceeds 0.7, with a actual value about 0.716. It means that 71.6% of total variance explained by these PCs. Therefore, we can choose first two weighted equation (principal


component) from our result and listed as following: P C1 = −0.381140hk−0.227562jp−0.619441kr−0.365930ph−0.363466sg−0.391439tw P C2 = −0.1810871hk+0.008003jp+0.715916kr−0.608028ph−0.228936sg−0.180273tw The coefficients in P C1 have the same direction, and we could name P C1 ”general Asia index” that stands for entire Asia stock market. As mentioned in the above, P C1 gives a higher weight to Korea, meaning Korea is more representative than other countries. Then, we see P C2 in the result. Interestingly, the direction of coefficient of Korea and Japan contrast with other countries’s. We might name P C2 ”regional feature” ”regional feature”, respectively.


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