"Risk and Asset Allocation" - Springer, by Attilio Meucci

Textbook: Swaps modeling using Principal Component Analysis

Risk and Asset Allocation, Springer 2005

We present PCA applied to the swap market. By setting the problem in the continuum we provide a frequency-based interpretation of the classical “level-slope-hump” principal component factorization. From this we compute the distribution of the swap prices exactly and by means of the duration-convexity approximation.


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