Statistical Analysis Of The Term Structure Of Interest Rate And Immunization Using PCA

In recent years, The appearance of Treasury futures and the process of the interest rate liberalization has caused great impact on the interest rate of Treasury in China. Some changes of the term structure of Treasury rate has occurred in this situation. In this paper we have empirically studied the modes of the spot rate term structure through the methods of principal component analysis. We find that the first three principal components can explain the variation of yield curve by76.71%. This result shows three principal components can explain almost the total volatility of yield curve just like in other developed market economy. However, there are also some special aspects of the yield curve of China. For instance, the short-term rates have more influence on the yield curve than the long-term rates. The influences of long-term rates on yield curve coverage to zero as the term extend.Principal Component Analysis has been proved to be an excellent method of using historical data to find the best set of fundamental directions in which to determine the spot rate changes. In this article, we develop the multi-direction immunization strategy based on principal component analysis. We use the eigenvectors of principal component analysis to immunize the bond portfolios against the variation of interest rates.