Empirical analysis of term structure shifts

Abstract

Principal component analysis and factor analysis of term structure movements shows that between 80 and 90% of term structure shifts can be explained by a uniform shift that is roughly parallel. In contrast, our analysis of term structure data from 1986 to 2016 reveals that only 57% of the shifts have been uniform. Twist-and butterflytype shifts accounted for 28 and 10%, respectively, of all shifts. Remarkably, these frequency results are roughly the same for uniform and twist shifts determined on a daily, weekly, and monthly basis over the entire sample and over three subperiods. Based on historical data, an investor should expect a uniform shift in the term structure about 57% and a twist 28% of the time. Keywords Term structure shift • Spot rates • Principal component analysis JEL Classification G12 1 Macaulay (1938) originated the concept of duration. Bierwag et al. (1983) provided an excellent survey of the literature. 2 The prices on zero coupon bond, from which the returns were calculated, are based on spot rates implied by in prices of coupon bonds.

Analysis of the Term Structure of Major Currencies Using Principal Component Analysis and Autoencoders

“…Recently, several studies have attempted to analyze term structure with data-driven models, and principal component analysis (PCA) has been widely used to analyze various term structures (Novosyolov and Satchkov [11], Chantziara and Skiadopoulos [12], Juneja [13], Sowmya et al [14], Wellmann and Trück [15], Choi [16], Barber [17]). In particular, Novosyolov and Satchkov [11] performed an analysis using PCA on US, EU, and UK Treasury bills, and LIBOR (London Interbank Offered Rate).…”