Non-negative matrix factorization and term structure of interest rates

Non-Negative Matrix Factorization (NNMF) is a technique for dimensionality reduction with a wide variety of applications from text mining to identification of concentrations in chemistry. NNMF deals with non-negative data and results in non-negative factors and factor loadings. Consequently, it is a natural choice when studying the term structure of interest rates. In this paper, NNMF is applied to obtain factors from the term structure of interest rates and the procedure is compared with other very popular techniques: principal component analysis and Nelson-Siegel model. The NNMF approximation for the term structure of interest rates is better in terms of fitting. From a practitioner point of view, the NNMF factors and factor loadings obtained possess straightforward financial interpretations due to their non-negativeness.

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