Principal Component Analysis Applied to Forward rates I: Experiments with Empirical Data

Abstract

In this paper, we perform an estimation of the volatility of the forward rate using the Fourier method proposed by Malliavin and Mancino [4], together with the classical Principal Component Analysis. We have observed similar anomaly with the one in Liu [2]. We also give a remark on the practical use of the Malliavin-Mancino method.