TVICA - time varying independent component analysis and its application to financial data

Source extraction and dimensionality reduction are important in analyzing high dimensional and complex financial time series that are neither Gaussian distributed nor stationary. Independent component analysis (ICA) method can be used to factorize the data into a linear combination of independent components, so that the high dimensional problem is converted to a set of univariate ones. However conventional ICA methods implicitly assume stationarity or stochastic homogeneity of the analyzed time series, which leads to a low accuracy of estimation in case of a changing stochastic structure. A time varying ICA (TVICA) is proposed here. The key idea is to allow the ICA filter to change over time, and to estimate it in so-called local homogeneous intervals. The question of how to identify these intervals is solved by the LCP (local change point) method. Compared to a static ICA, the dynamic TVICA provides good performance both in simulation and real data analysis. The data example is concerned with independent signal processing and deals with a portfolio of highly traded stocks.