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If you look at changes of the points on the yield curve, then you probably find something stationary - right? Applying PCA on the covariance of these changes makes sense. E.g. you will find out that on PC describes a parallel shift (a change in the yield curve). Look at this question too: What do eigenvalues/eigenvectors of the yield/forward rates ...


2

Following @silencer's comment, your formula for variance is wrong. I would suggest that instead of trying to re-invent the wheel, you just use the formula that everyone else uses. So I'd replace your first indented line with $$ w^{*}\equiv argmin\left\{ \frac{1}{2}w'\varSigma w-\lambda\left(w'\mathbf{1}-1\right)\right\} $$ which will give you $$ ...


1

The derivation is correct and given the formula you should get $w^{*'} \vec{1} = 1$. My guess is that the inversion of the $\Omega$ matrix is numerically badly conditioned. Instead of implementing the formula as it is, have you tried to calculate $\vec{1}^{'} \Omega^{-1}$ and $e^{'} \Omega^{-1}$ only once and rewrite: $$ w^{*\prime} = \frac{1}{2}\left[ ...



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