Rates trading quant skills?
What type of quant skills and work is done on rate trading desks? Also, how is PCA used on these desks? Thanks
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Hey, since no one answered, I'll try to chip in to get a conversation going.
There's a good paper on how PCA is applied to rates published by Credit Suisse which should give you all you need to understand how PCA is used. Search up PCA Unleashed.
In terms of quant skills, there's a bunch of papers you should be able to look up on techniques used to estimate the yield curve, but in general, the methods applied are meant to estimate the term structure of forward rates and are often used to derive relative value opportunities from the estimates. From there, you would go short the rich and go long the cheap.
Recreating the PCA unleashed paper would be a good start though to get an idea of what people are doing in this area.
PCA helps you breakdown how the yield curve shifts, which is very effective. For example, the most important shift is a parallel shift. How the yield curve shifts will significantly impact your risk profile and positioning. Many e-trading rates desk have this implemented
Thanks for this. Are rate traders actually programming these tools, or are they just using PCA algorithms made for them? On a related note, what level of programming is really required for a rates trading desk?
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