Principal component analysis of swap curve movements in two different swap markets : the Norwegian -and Euro swap market

摘要

Analyzing and modeling the risk inherent in term structure of interest rates is crucial for participant in financial markets, e.g. banks and investors with portfolios containing a large portion of interest rate sensitive securities. This thesis aims to identify what factors that have historically driven the shape of the swap curves in the Norwegian –and euro swap market from 2000-2014, with corresponding sub-periods analyzed. By applying Principal Component Analysis (PCA) on basis point changes for swap rates with different maturities in both swap curves I was able to identify several interesting features from the sample period(s), 1) movements in the Norwegian swap curve has been more volatile than in the case of the euro swap curve, thus indicating that more emphasis on the second principal component is needed for reaching a sufficient level of explanatory power, 2) various interest rate regimes yields different results. Again, movements in the Norwegian swap curve are more volatile; outputs from PCA indicate that the shape of the Norwegian swap curve fluctuates more given the prevailing interest rate regime.