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A Note on the Relation Between Principal Components and Dynamic Factors in Affine Term Structure Models
Brazilian Review of Econometrics
View Archive Info| Field | Value | |
| Title |
A Note on the Relation Between Principal Components and Dynamic Factors in Affine Term Structure Models
A Note on the Relation Between Principal Components and Dynamic Factors in Affine Term Structure Models |
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| Creator |
Almeida, Caio Ibsen Rodrigues de; Ibmec-RJ
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| Subject |
Term Structure of Interest Rates; Dynamic Affine Models; Principal Component Analysis; Maximum Likelihood
C5; C51 Term Structure of Interest Rates; Dynamic Affine Models; Principal Component Analysis; Maximum Likelihood C5; C51 |
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| Description |
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
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 |
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| Publisher |
Sociedade Brasileira de Econometria
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| Date |
2005-05-01
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| Type |
info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion — — |
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| Format |
application/pdf
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| Identifier |
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/2673
10.12660/bre.v25n12005.2673 |
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| Source |
Brazilian Review of Econometrics; Vol 25, No 1 (2005); 89–114
Brazilian Review of Econometrics; Vol 25, No 1 (2005); 89–114 1980-2447 |
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| Language |
eng
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| Relation |
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/2673/1624
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