Abstract:

Based on previous research addressing the use of Principal Components Analysis (PCA) in modeling the dynamics of sovereign yield curves, we investigate certain characteristic of the Romanian bond market and try to build yield curve scenarios that are historically plausible and of plausible shape and magnitude. The empirical analysis performed on weekly data revealed that changes at slope level occur according to changes implied by the first principal component. Therefore, when a market movement of large amplitude is expected, predicting the yield curve based on the first principal component appears to be the most historically plausible approach. Also, the principle components coefficients (factor loadings) at 2 years were lower than those at 10 years, suggesting that in the case of market rallies, yields at 10 years will lower more than those at 2 years, leading to a flattening pattern of the yield curves.