According to KID/PRIIPS regulation in your opinion
in which case should PCA (as from article 23) be used?
Just for structured products and bond-related products or also in other cases? Do you have practical examples where you would use it?
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Typical uses of PCA in the industry are for modelling:
- Forward curves
- Yield curves
For the above cases, the first three Principal Components typically captures more than 95% of the curves moves, which makes it a powerful tool when it comes to curve modelling.
As Structured Products are a combination of an option component and a bond component, PCA would be used for the modelling of the bond component and more generally for bond-related products and, as I mentioned above, forward products.
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$\begingroup$ Thanks for your answe. What do you think about insurance-related products? $\endgroup$ – Thegamer23 Jun 1 '17 at 10:40
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$\begingroup$ For insurance-related products, I guess the focus is on credit risk and default probability. PCA is not relevant for such topics. $\endgroup$ – JejeBelfort Jun 1 '17 at 11:02
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$\begingroup$ @Simons123 Also, feel free to mark the answer as "solved" if this is indeed the case ;) Thanks $\endgroup$ – JejeBelfort Jun 1 '17 at 14:13
