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Activity Number: 163 - Methods for Complex Data: The Next Generation
Type: Topic Contributed
Date/Time: Monday, July 29, 2019 : 10:30 AM to 12:20 PM
Sponsor: Business and Economic Statistics Section
Abstract #301787 Presentation
Title: Projection pursuit based generalized betas accounting for higher order co-moment effects in financial market analysis
Author(s): Sven Serneels*
Companies: Aspen Technology
Keywords: Dimension reduction; Projection pursuit; Non-gaussian data; Market Analysis; Betas; Financial Returns

Betas are possibly the most frequently applied tool to analyze how securities relate to the market. While in very widespread use, betas only express dynamics derived from second moment statistics. Financial returns data often deviate from normal assumptions in the sense that they have significant third and fourth order moments and contain outliers. This paper targets to introduce a way to calculate generalized betas that also account for higher order moment effects, while maintaining the conceptual simplicity and interpretability of betas. Thereunto, the co-moment analysis projection index (CAPI) is introduced. When applied as a projection index in the projection pursuit (PP) framework, generalized betas are obtained as the directions optimizing the CAPI objective. A version of CAPI based on trimmed means is introduced as well, which is more stable in the presence of outliers. Simulation results underpin the statistical properties of all projections and a small, yet highly illustrative example is presented.

Authors who are presenting talks have a * after their name.

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