Applying Principal Component Analysis

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The term structure of interest rates (“yield curve”) is a representation that plots bonds of the same type (e.g. credit quality, sector) in terms of their prices, expressed as yields, over different maturity dates. For financial institutions is it crucial to understand its behavior and the direct implications it has on the firms capital base.

In this article I study the underlying dynamics of the yield curve by decomposing it into its main drivers. Therefore I will apply Principal Component Analysis (PCA), as proposed in several academic papers. The following topics will be explored:

  1. Introduce the data


A complete walk-through starting from scratch

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During quarantine times like these, the classic UNO card game emerged to be one of the most frequently played games between my girlfriend and me. After countless rounds and several major winning streaks on each side, I was curious if an optimal game strategy could be analytically derived, that would significantly outperform in the long-run.

My journey consisted of the following parts:

  1. Creating a game engine of the UNO card game in Python from scratch

1. UNO Card Game Engine

In order…

Bernhard Pfann

Finance professional tapping into data science | MSc Business Analytics | MSc Finance. LinkedIn: https://www.linkedin.com/in/bernhard-pfann/

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