Anon

256 The Basics of financial economeTrics

FIGUre 12.1 Plot of Principal Components and Eigenvalues

−4 0 5 10 15 20

−2

0

2

4

6

8

Time

Value of the principal component

PC1

PC8

A. Value of First and Last Principal Components

1 2 3 4 5 6 7 8

0

1

2

3

4

5

6

Indices of the largest eight eigenvalues

Magnitude of the eigenvalues

B. Eigenvalues of the Covariance Matrix of Data