Level-Slope-Curvature - Fact or Artefact?

Roger Lord and Antoon Pelsser

Applied Mathematical Finance, 2007, vol. 14, issue 2, 105-130

Abstract: The first three factors resulting from a principal components analysis of term structure data are, in the literature, typically interpreted as driving the level, slope and curvature of the term structure. Using slight generalizations of theorems from total positivity, we present sufficient conditions under which level, slope and curvature are present. These conditions have the nice interpretation of restricting the level, slope and curvature of the correlation surface. It is proven that the Schoenmakers-Coffey correlation matrix also brings along such factors. Finally, we formulate and corroborate a conjecture that the order present in correlation matrices cause slope.

Keywords: Principal components analysis; correlation matrix; term structure; total positivity; oscillation matrix; Schoenmakers-Coffey matrix (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (9)

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DOI: 10.1080/13504860600661111

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