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Term Structure Factor Models

In this article we explain how PCA can be applied to obtain a factor model for a term structure, such as a single yield curve of a term structure of futures or forwards. Specifically, we will:

  • Apply PCA to term structure of interest rates
  • Compute P&L of interest rates sensitive portfolios
  • Define basis risk and derive a precise risk decomposition of currency and commodity derivatives
  • Discuss the interpretation of principal components

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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