Analyzing LQ 45 Index using Principal Component Analysis Brady Rikumahu
Telkom University
Abstract
This paper presents an approach of dimension reduction to the LQ 45 index of the Indonesia Stock Exchange. Specifically, this paper has several objectives. First, this paper aims to reduce the complexity of the data into a small number of principal components which forms the linear combinations of prices that minimizes information loss and can explain as much as possible the variation in price data. Second, this paper aims to find the relative importance of the variables in the component. Third, this paper also aims to find whether certain stocks groups with others and whether there are some common attributes between certain stocks for us to further study so as to get more insights. This paper used 44 of 45 stocks included in the LQ 45 index. The firs findings is that there are 7 principal components formed out of the 45 stocks. For the first Principal Component, the five largest factor loadings are PTPP, BRPT, WSKT, PGAS, and BBCA, respectively. For the second Principal Component, the five largest factor loadings are EMTK, ANTM, TBIG, HRUM, and TINS, respectively. Third, the results shows that some stocks tend to clusters with others. Some stocks in the Principal Component 1 has negative values which shows that they affect Principal Component 1 in a negative way, while others have positive value. Moreover, for the Principle Component 2, there are stocks that has negative value, which shows that those stocks are defensive stocks, and some have positive value which shows that they are cyclical stocks
