It is widely known that the common risk-factors derived from PCA beyond the first eigenportfolio are generally difficult to interpret and thus to use in practical portfolio management. We explore a alternative approach (HPCA) which makes strong use of the partition of the market into sectors. We...

This paper discusses portfolio construction for investing in N given assets, e.g. constituents of the Dow Jones Industrial Average (DJIA) or large cap stocks, which is based on partitioning the investment universe into clusters. The clusters are determined from the trailing correlation matrix...

Modeling cross-sectional correlations between thousands of stocks, acrosscountries and industries, can be challenging. In this paper, we demonstratethe advantages of using Hierarchical Principal Component Analysis (HPCA)over the classic PCA. We also introduce a statistical clustering algorithmto...