How to Deform a Yield Curve: The Most Likely Deformation of a Yield Curve Consistent with Subjective Views
Posted: 30 May 2014
Date Written: May 29, 2014
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: Suggested Citation