This paper reviews various treatments of non-metric variables in Partial Least Squares (PLS) and Principal Component Analysis (PCA) algorithms. The performance of different treatments is compared in the extensive simulation study under several typical data generating processes and...

Principal Component Analysis (PCA) is a common procedure for the analysis of financial market data, such as implied volatility smiles or interest rate curves. Recently, Pelsser and Lord [11] raised the question whether PCA results may not be 'facts but artefacts'. We extend this line of research...