Euribor term structure

Posted: February 8, 2010 in Euribor, Term structure

In previous posts, we observed the term structure characteristics of the eurodollar contract.  Here, we will discuss the euribor contract.

Let’s examine the correlation of the term structure.  From the graph below, it is apparent that the higher correlations of year’s past has been decaying due to recent surges in uncertainty in monetary policy.

Next, let’s examine the volatility of the term structure.

Note that in these charts the horizontal axis is the contract number Whites are 1-4, Reds are 5-8, etc.  Notice the recent surge in volatility; I like to break the term structure examinations down by front month in this fashion.

When I do these analysis, I try to fit a SchoenmakersCoffey model to the correlation curve to smooth out some of the weird issues in the back end of the curve when using daily settlements.  A great reference is this thesis (http://www.packham.net/data/Thesis.pdf) and leads into a topic for our next discussion, principle component analysis (PCA).  Check out this seminar (http://www.math.umn.edu/finmath/seminar/Materials/tolmasky1.pdf) on PCA for next time around.

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