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bats66
Topic Author
Posts: 9
Joined: May 27th, 2007, 11:31 am

PCA Weighted Swap Butterflies

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.

Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

PCA Weighted Swap Butterflies

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