This paper proposes a novel methodology, based on the Common Principal Component analysis, allowing one to estimate the factors driving the term structure of interest rates, in the presence of time-varying covariance structure. The advantages of this method are first, that, unlike classical...

This paper proposes a novel methodology, based on the Common Principal Component analysis, allowing one to estimate the factors driving the term structure of interest rates, in the presence of time-varying covariance structure. The advantages of this method are first, that, unlike classical...

This paper proposes a novel methodology, based on the Common Principal Component analysis, allowing one to estimate the factors driving the term structure of interest rates, in the presence of time-varying covariance structure.

It is common practice to identify the number and sources of shocks that move implied volatilities across space and time by applying Principal Components Analysis (PCA) to pooled covariance matrices of changes in implied volatilities. This approach, however, is likely to result in a loss of...