How to Deform a Yield Curve: The Most Likely Deformation of a Yield Curve Consistent with Subjective Views

Posted: 30 May 2014

See all articles by Ivan Saroka

Ivan Saroka

University of Oxford - Mathematical Institute; Pacific Investment Management Company (PIMCO)

Riccardo Rebonato

University of Oxford - Mathematical Institute

Date Written: May 29, 2014

Abstract

We show how the most likely deformation can be assigned to a yield curve, consistent with subjetive views on a handful of key rates. We provide an inutive explanation for the solution, which is perhaps not what one might at first blush have expected. We draw analogies from physics that illuminate the reasoning.

Keywords: principal components, yield curve modelling, risk management

JEL Classification: E40, F30, G10, G20

Suggested Citation

Saroka, Ivan and Rebonato, Riccardo, How to Deform a Yield Curve: The Most Likely Deformation of a Yield Curve Consistent with Subjective Views (May 29, 2014). https://doi.org/10.3905/jfi.2014.24.3.030. Available at SSRN: https://ssrn.com/abstract=2443285 or http://dx.doi.org/10.2139/ssrn.2443285

Ivan Saroka (Contact Author)

University of Oxford - Mathematical Institute ( email )

Andrew Wiles Building
Radcliffe Observatory Quarter (550)
Oxford, OX2 6GG
United Kingdom

Pacific Investment Management Company (PIMCO) ( email )

United States

Riccardo Rebonato

University of Oxford - Mathematical Institute ( email )

United Kingdom

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