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Dear All,I am looking at some fixed income literatures and found one common technique that many people use is called Factor Loading. Can anyone shed some lights on what books or papers that elaborate on this topic? Thanks in advance.

I think you mean factor analysis, which is a social science term for principal component decomposition. The factor loadings translate data to components.For example, you might decompose the yield curve into three different factors that correspond to level, steepness and twist. Each of these moves independently, unlike, say, the 1-year and 10-year interest rates. The factor loadings for the 1-year rate might be 0.9*F1 - 1*F2 + 1*F3.

any finance book on APT would talk about factor loadings.

The attached paper from the Univ of Chicago FinMath Fixed Income course is a good illustration of what Aaron is talking about.

Aaron, thanks. You have answered numerous questions of mine and I am indebted to you. KackToodles and Athletico, thanks. Those papers are exactly what I need to read.

Hallo guys,...I need literatur and especially a software for "Dynamic Factor Analysis". Do you something or someone how can help me in this matter?

I do not recommend the technique, but a good introduction in finance is The Generalized Dynamic-Factor Model: Identification and Estimation by Forni, Hallin and Reichlin.

Hi Aaron,Would you please kindly elaborate on why you do not recommend this method?Thanks,J