The Mathematics of Financial Modelingand Investment Management

20-Term Structure Page 633 Wednesday, February 4, 2004 1:33 PM

EXHIBIT 20.4

Summary of Some Popular Studies of Yield Curve Dynamics

Authors

Country (Period)

Kind of Rates

Range Factors

% of Explanation

633

Robert Litterman and José Scheinkman, “Common Factors Affecting Bond Returns,”

Journal of Fixed Income

(June 1991), pp. 54–61.

C. Kanony and M. Mokrane, “Reconstitution de la courbe des taux, analyse des fac

• 
  

teurs d’évolution et couverture factorielle,”

Cahiers de la Caisse Autonome de Refi

• 
  

nancement

1 (June 1992).

R.L. D’Ecclesia and S.A. Zenios, “Risk Factor Analysis and Portfolio Immunization in

the Italian Bond Market,”

Journal of Fixed Income

4, no. 2 (September 1994), pp. 51–

58.

J. Kärki and C. Reyes, “Model Relationship,”

Risk

7, no. 12 (December 1994), pp. 32–35.

J.R. Barber and M.L. Copper, “Immunization Using Principal Component Analysis,”

Journal of Portfolio Management

(Fall 1996), pp. 99–105.

A. Bühler and H. Zimmerman, “A Statistical Analysis of the T

erm Structure of Interest

Rates in Switzerland and Germany,”

Journal of Fixed Income

6, no. 3 (December

1996), pp. 55–67.

Golub, B. W., and L. M. Tilman, “Measuring Yield Curve Risk Using Principal Compo

• 
  

nents Analysis, Value at Risk, and Key Rate Durations,”

Journal of Portfolio Man

• 
  

agement

(Summer 1997), pp. 72–84.

I. Lekkos, “A Critique of Factor Analysis of Interest Rates,”

Journal of Derivatives

(Fall

2000), pp. 72–83.

L. Martellini and P. Priaulet,

Fixed-Income Securities: Dynamic Methods for Interest

Rate Risk Pricing and Hedging

(New York: John Wiley & Sons, 2000).

U.S. (1984–88)

Spot Zero-

6M–18Y

3

88.04/8.38/1.97

Coupon (ZC)

France (1989–90)

Spot ZC

1Y–25Y

2

93.7/6.1

Italy (1988–92)

Spot ZC

6M–7Y

3

93.91/5.49/0.42

Germ./Switz./U.S.

Spot ZC

3M–10Y

3

Total: 97/98/98

(1990–94)

U.S. (1985–91)

Spot ZC

1M–20Y

3

80.93/11.85/4.36

Germany

(1988–96)

Spot ZC

1M–10Y

3

71/18/4

Switzerland

(1988–96)

75/16/3

RiskMetrics

Spot ZC

3M–30Y

3

92.8/4.8/1.27

09/30/96)

U.S. (1984–95)

1–Year

1Y–9Y

5

56.5/17.4/9.86/8.12/4.3

Germany (1987–95)

Forward

50.6/17.3/13.5/8.8/5.8

U.K. (1987–95) Japan (1987–95) France (1995–98)

Spot ZC

63.5/6.3/7.5/8.1/5.342.8/25.5/17.1/6/4.9

1M–10Y

3

66.64/20.52/6.96

Note: M

stands for month and

Y

for year. For example, “88.04/8.38/1.97” means that the first factor explains 88.04% of the yield curve

variations, the second 8.38%, and the third 1.97%. Sometimes, we also provide the total amount by adding up these terms.Source:

Exhibit A1 in Lionel Martellini, Philippe Priaulet, and Stéphane Priaulet,

“An Empirical Analysis of the Domestic and Euro

Yield Curve Dynamics,” Chapter 24 in Frank J. Fabozzi and Moorad Choudhry (eds.),

The Handbook of European Fixed Income

Markets

(Hoboken, NJ: John Wiley & Sons, 2004).