ON DYNAMIC FORWARD RATE MODELING AND PRINCIPAL COMPONENT ANALYSIS

Hans-Peter Bermin ()
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Hans-Peter Bermin: Knut Wicksell Centre for Financial Studies, Lund University, S-221 00 Lund, Sweden

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 05, 1-20

Abstract: 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.

Keywords: Interest rates; yield curve; term structure; forward rates; principal component analysis; Karhunen–Loève expansion (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024914500290

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