Functional Data Analysis of Interbank Offered Rates

• Activity Number: 176
• Type: Contributed
• Date/Time: Monday, August 10, 2015 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Sanhita Sengupta*
• Companies: Indian Statistical Institute
• Keywords: Functional Principal Component Analysis ; LIBOR ; MIBOR ; EURIBOR ; Multiple Regression ; Yield Curve

Abstract

The yield curve represents the interest rate as a function of maturity. We study the yield curves of different markets, namely London (LIBOR), European (EURIBOR) and Indian (MIBOR), using functional data analysis. Since MIBOR for each day is declared first, we use this as a predictor of the others. We apply the method regression analysis of functional data where both the predictor and response variables are functions. The method consists of principal components analysis of functional data and subsequently modelling the principal component score in a multiple regression framework. Using daily yield curves for a period of 5 months, it is observed that MIBOR is a good predictor for EURIBOR, but not for LIBOR.