Level-Slope-Curvature - Fact or Artefact?
AbstractThe 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.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 14 (2007)
Issue (Month): 2 ()
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Other versions of this item:
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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- Jong, F.C.J.M. de & Driessen, J. & Pelsser, A., 2004.
"On the information in the interest rate term structure and option prices,"
Open Access publications from Tilburg University
urn:nbn:nl:ui:12-3159390, Tilburg University.
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- Santa-Clara, Pedro & Sornette, Didier, 2001. "The Dynamics of the Forward Interest Rate Curve with Stochastic String Shocks," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 149-85.
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