Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2005-09-08 Number: 05-083/2 Author-Name: Roger Lord Author-Email: firstname.lastname@example.org Author-Workplace-Name: Erasmus Universiteit Rotterdam, and Rabobank International, Utrecht. Author-Name: Antoon Pelsser Author-Email: email@example.com Author-Workplace-Name: Erasmus Universiteit Rotterdam, and ING Group, Amsterdam. Title: Level-Slope-Curvature - Fact or Artefact? Abstract: The first three factors resulting from a principal components analysis of term structure data are in the literature typically interpreted as driving the level, slope and curvature of the term structure. Using slight generalisations of theorems from total positivity, we present sufficient conditions under which level, slope and curvature are present. These conditions have the nice interpretation of restricting the level, slope and curvature of the correlation surface. It is proven that the Schoenmakers-Coffey correlation matrix also brings along such factors. Finally, we formulate and corroborate our conjecture that the order present in correlation matrices causes slope.
This discussion paper resulted in a publication in Applied Mathematical Finance, 2007, 14(2), 105-30. Classification-JEL: C50; C60; G10 Keywords: Principal components analysis; correlation matrix; total positivity; oscillation matrix; Schoenmakers-Coffey matrix File-Url: http://papers.tinbergen.nl/05083.pdf File-Format: application/pdf File-Size: 368027 bytes Handle: RePEc:tin:wpaper:20050083