Application of Principal Component Analysis in Chinese Sovereign Bond Market and Principal Component-Based Fixed Income Immunization

TL;DR

This paper uses Principal Component Analysis to identify key factors influencing Chinese sovereign bond yields and explores a multi-factor immunization model for hedging market risk in bond portfolios.

Contribution

It applies PCA to Chinese sovereign bond data and introduces a multi-factor immunization approach for fixed income risk management.

Findings

Identified main principal components affecting bond yields.

Developed a multi-factor immunization model for bond portfolios.

Provided insights into interest rate risk hedging strategies.

Abstract

This paper analyses the Chinese Sovereign bond yield to find out the principal factors affecting the term structure of interest rate changes. We apply Principal Component Analysis (PCA) on our data consisting of the Chinese Sovereign bond from January 2002 till May 2018 with the different yield to maturity. Then we will discuss the multi-factor immunization model (method on hedging market risk) on a bond portfolio.