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On Dynamic Forward Rate Modeling And Principal Component Analysis

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  • HANS-PETER BERMIN

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

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.

Suggested Citation

  • Hans-Peter Bermin, 2014. "On Dynamic Forward Rate Modeling And Principal Component Analysis," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(05), pages 1-20.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:05:n:s0219024914500290
    DOI: 10.1142/S0219024914500290
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    References listed on IDEAS

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    5. Carl Chiarella & Oh Kang Kwon, 2001. "Forward rate dependent Markovian transformations of the Heath-Jarrow-Morton term structure model," Finance and Stochastics, Springer, vol. 5(2), pages 237-257.
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    Cited by:

    1. Hans-Peter Bermin & Gareth Williams, 2017. "On Cash Settled Irr-Swaptions And Markov Functional Modeling," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(02), pages 1-20, March.
    2. Laurini, Márcio Poletti & Ohashi, Alberto, 2015. "A noisy principal component analysis for forward rate curves," European Journal of Operational Research, Elsevier, vol. 246(1), pages 140-153.

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