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 coun-
tries 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), Ko-
rea(kr), Philippines(ph), Singapore(sg) and Taiwan(tw).

2 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, Philip-
pines, Singapore, Taiwan
– Weekly aggregate index return rate

= ln(close pricet ) − ln(close pricet−1 )

• Observations: 937

3 Covariance Matrix
First, values in covariance matrix are adjusted to six decimal places for sim-
plicity. 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.

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 Table 1: Covariance Matrix
hk jp kr ph sg tw
hk 0.001261
jp 0.000397 0.000838
kr 0.000886 0.000627 0.002913
ph 0.000666 0.000338 0.000610 0.001765
sg 0.000799 0.000418 0.000815 0.000753 0.001086
tw 0.000716 0.000381 0.000868 0.000585 0.000689 0.001595

Table 2: Correlation Matrix

hk jp kr ph sg tw
hk 1.0000000
jp 0.3860739 1.0000000
kr 0.4625107 0.4012562 1.0000000
ph 0.4462651 0.2782148 0.2689110 1.0000000
sg 0.6828179 0.4379678 0.4581428 0.5437817 1.0000000
tw 0.5050966 0.3292490 0.4028976 0.3487346 0.5236347 1.0000000

4 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.

5 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

2
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 ”gen-
eral 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.