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While hacking some trading techniques, I came across an author trying to link Factor analysis and Arbitrage Pricing Theory(Ross). I was wondering the use for it . My thinking was a classic case of an empiricist. Today I came across a reference to a old paper which says the link provided has some meaning to it. It is always better to have some theoretical model before pca/factor analysis/ eigen value decomposition.

Just because there is computational power and software doesn’t mean that your hypotheses(read crap, most of the times) are true.

In the words of the J. Scott Armstrong

“The cost of doing factor analytic studies has dropped substantially in recent years. In contrast with earlier time,. it is now much easier to perform the factor analysis than to decide what you want to factor analyze. It is not clear that the resulting proliferation of the literature will lead us to the development of better theories. Factor analysis may provide a means of evaluating theory or of suggesting revisions in theory. This requires, however, that the theory be explicitly specified prior to the analysis of the data. Otherwise, there will be insufficient criteria for the evaluation of the results.
If principal components is used for generating hypotheses without an explicit a priori analysis. the world will soon be overrun by hypotheses.”

Link to the paper : Tom Swift and His Electric Factor Analysis Machine