Principal Component Analysis and Factor Extraction › Key Parameters

Michael BrenndoerferDecember 12, 20251 min read
Quantitative FinanceAll chapters
Part 8 of 15Econometrics and Statistical Modeling
Chapter 44Principal Component Analysis and Factor Extraction › Key Parameters
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The key parameters for Principal Component Analysis are:

  • X: The input data matrix of shape (n,p)(n, p), where nn is the number of observations and pp is the number of variables.
  • n_components: The number of principal components to retain. This determines the dimensionality of the reduced data.
  • Standardization: Whether to scale variables to unit variance before analysis. This is critical when variables have different units or vastly different variances.
  • Centering: PCA requires data to be centered (mean zero). This is handled automatically by most libraries but is a necessary preprocessing step in manual implementation.