Partial Least Squares Finance
Partial Least Squares in Finance
Partial Least Squares (PLS) is a powerful multivariate statistical technique used in finance to model complex relationships between predictor variables (X) and response variables (Y). Unlike ordinary least squares regression (OLS), which assumes independence among predictors, PLS is particularly effective when dealing with datasets characterized by multicollinearity, high dimensionality (many predictors), and relatively few observations – scenarios common in financial modeling.