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Talk Abstract

IMA/MCIM Industrial Problems Seminar

IMA/MCIM Industrial Problems Seminar

November 30, 2001

**Dr. Carlos
Tolmasky
**Cargill

Carlos_Tolmasky@cargill.com

570
Vincent Hall

3:30 pm

One
of the most widely used methods to build yield curve models
is to use principal components analysis on the correlation
matrix of the innovations. R. Litterman and J. Scheinkman
found that three factors are enough to explain most of the
moves in the case of the US treasury curve. These factors
are level, steepness and curvature. Working in the context
of commodity futures, G. Cortazar and E. Schwartz found that
the spectral structure of the correlation matrices is strikingly
similar to those found by R. Litterman and J. Scheinkman.
We observe that in both cases the correlation between two
different contracts maturing at times t and s is roughly of
the form ^{|t-s|},
for a certain (fixed) 0
1. Assuming this correlation structure we prove that the observed
factors are perturbations of cosine waves.