Textbook: Linear Factor Models
Risk and Asset Allocation, Springer 2005

    Published On 20/03/2011
    Author Name : 
    Attilio Meucci
    Published Date: 
    Tuesday, Jan 4, 2005
    Last Update: 
    Friday, Aug 8, 2008

    In this Chapter, we discuss the main dimension-reduction techniques: explicit-factor approaches, such as regression analysis, and hidden-factor approaches, such as principal component analysis and idiosyncratic factors. To support intuition we stress the geometric interpretation of these approaches in terms of the location-dispersion ellipsoid. Finally we present a useful routine to perform dimension reduction in practice in a variety of contexts, including portfolio replication.