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schizoidman
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Posts: 123
Joined: September 21st, 2005, 7:17 pm

Calculating PC1 equivalent of a DV01 move

February 15th, 2019, 11:24 am

I'm trying to calculate a PC1 equivalent of a DV01 move and am getting a bit confused by the interpretation of the eigenvectors. The output of the first two eigenvectors are,
Tenor      PC2          PC1
1Y         -0.15028     0.05154
2Y         -0.32138     0.13310
3Y         -0.41856     0.20852
5Y         -0.41465     0.26116
7Y         -0.33315     0.29555
10Y        -0.19980     0.31919
15Y        -0.04874     0.33416
20Y         0.08760     0.34173

If I want to calculate a DV01 equivalent assuming the 5Y curve moves by 1bp, do I simply scale the eigenvectors till I get an appropriate move for the 5Y point. In other words, do the tenor shocks become,
0.197343561
0.509633359
0.798451041
1
1.131677872
1.222203892
1.279510769
1.308506297

Or do I use the method described here PCA? In which case, the tenor shocks become,
0.071660453
0.336473214
0.707324248
1
1.204548309
1.340536029
1.429582409
1.489268877

I am confused which one is the correct method. Would appreciate any thoughts.

Thank you in advance.
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