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bats66
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Joined: May 27th, 2007, 11:31 am

PCA Weighted Swap Butterflies

June 26th, 2007, 3:35 am

I've often come across terms like "PCA weighted" or "PCA neutral" interest rate swap butterflies. How does one work out the notional amounts (or durations) for this kind of structure? I suppose one has to do a PCA on the daily changes in swap rates, to obtain eigenvectors, eigenvalues, principal components, etc. Then what?Thanks in advance.
Last edited by bats66 on June 25th, 2007, 10:00 pm, edited 1 time in total.
 
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Martinghoul
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Joined: July 18th, 2006, 5:49 am

PCA Weighted Swap Butterflies

August 3rd, 2007, 6:27 pm

Then the loadings can be used as weights, with residuals as rich/cheap signals...