Infantino’s PCA Model, 2010
Infantino’s PCA Model, 2010
This model, from a large group of stocks e.g., S&P 500, computes, using Principal Component Analysis, the common factors that drive stock returns and filters out noises. We can then estimate the short term expected returns for each individual stock, hence a trading decision.
Moreover, the model proposes a way to use intraday volatility to estimate which of the two regimes we are in: mean-reversion or momentum.
Combining the estimated expected returns with the regime indicator, we do mean-reversion when the intraday volatility is small, and trend following when the intraday volatility is big.
References
Developing high-frequency equities trading models
