A Note on the Relation Between Principal Components and Dynamic Factors in Affine Term Structure Models

Caio Almeida ()

Brazilian Review of Econometrics, 2005, vol. 25, issue 1

Abstract: In econometric applications of the term structure, affine models are among the most used ones. Nevertheless, even presenting a closed form characteristic function, its estimation procedure still presents many points to be understood and difficulties to be removed. In this note, we address one of these points. Suppose we estimate an affine dynamic term structure model, and also apply principal component analysis to the interest rate database available. A very plausible question would inquire about the relation (if any) between the principal components obtained assuming no dynamic restrictions, and the dynamic factors estimated using the proposed term structure model. We answer this question when estimating a standard affine model using zero coupon data. We show that each principal component can be approximated by a linear transformation of the dynamic factors. Although simple, this is an important step to the understanding of the mechanics of dynamic affine term structure models. A numerical example using U.S. zero data illustrates the result

Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://periodicos.fgv.br/bre/article/view/2673 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sbe:breart:v:25:y:2005:i:1:a:2673

Access Statistics for this article

Brazilian Review of Econometrics is currently edited by Daniel Monte

More articles in Brazilian Review of Econometrics from Sociedade Brasileira de Econometria - SBE Contact information at EDIRC.
Bibliographic data for series maintained by Núcleo de Computação da FGV EPGE ().