Author:
Almeida Caio Ibsen Rodrigues de
Abstract
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
Subject
General Earth and Planetary Sciences,General Environmental Science
Cited by
2 articles.
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