Tuckman Principal Component Analysis

[afterworkguinness]

Hi,
Tuckman chapter 6 says the data in table 6.5 implies "hedging one short term bond with another will not be so effective as hedging one long term bond with another"

Can you clarify this?

I can see from the data in table 6.5 that a 1 standard deviation increase in all rates in the term structure had the largest effect on the longer term maturities, but I don't understand how that ties in with the statement above.

Thanks

 

[ami44]

I read it, that for short term bonds you need more PCs to hedge them effectivly, since the first component (Level) is not that dominant in the short term. You need to go at least to the third component for short term exposure.
The next sentence seems to point in that direction:
"Or, put in another way, relativly more factors or hedging securities are needed to hedge portfolios that are concentrated at the short end of the curve"

But I also find that sentence not awfully clear, so I'm not sure.

 

[afterworkguinness]

Hi @ami44, I must have missed that. Needed more PCs to explain the the variance of the very short term makes sense. Thanks so much.