ON DYNAMIC FORWARD RATE MODELING AND PRINCIPAL COMPONENT ANALYSIS

In this paper, we show how to construct dynamic forward rate models in terms of exogenously specified eigenfunctions (or factor loadings). We also show how to link forward rate models with different number of driving Brownian motions to each other in a way consistent with the implied eigenfunctions. Finally, we discuss how to best parameterize the models in the sense of maximizing the number of free parameters for a given set of eigenfunctions.

MoreLess

Year of publication:	2014
Authors:	BERMIN, HANS-PETER
Published in:	International Journal of Theoretical and Applied Finance (IJTAF). - World Scientific Publishing Co. Pte. Ltd., ISSN 1793-6322. - Vol. 17.2014, 05, p. 1450029-1
Publisher:	World Scientific Publishing Co. Pte. Ltd.
Subject:	Interest rates \| yield curve \| term structure \| forward rates \| principal component analysis \| Karhunen–Loève expansion

More details

Extent:	application/pdf text/html
Type of publication:	Article
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10010883208