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Review and case study of PCA

This article shows an illustration of principal component analysis (PCA) and how it can be applied to model systems of interest rates. In particular, we will see:

  • a theory review of the PCA technique
  • an application to a system of 50 UK interest rates
  • how to interpret the PCA results – eigenvalues and explained variation
  • the difference between applying PCA to covariance and correlation matrix

Find the source code for this article in the offical Github repository at the link: github.com/gbaglini/baglinifinance

Gianluca Baglini
Gianluca Baglini

Quantitative Researcher & Investment Analyst

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