It is common knowledge in risk management that movements of interest rate curves can be mainly described by just a few factors (often named “shift,” “twist,” and “butterfly”).

In this paper, we analyze if this knowledge is supported by evidence; we study what these factors look like and how many of them are needed to obtain a reasonable approximation.
Finally, we discuss how these principal components could be applied for the fast calculation of key figures in quantitative risk management, especially for doing a historical value-at-risk (VaR) simulation.

To get the whole article, please download the article A clever handful is enough.