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Uncertainty and the yield curve

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  • Hackworth, J.F.

Abstract

This paper proposes a logistic model for the pricing of future receipts due from government bonds. The model is derived from the assumption that uncertainty about valuations increases the further forward the receipt is scheduled. The entropy of a probability distribution is used as the measure of uncertainty. The model leads to yield curves typically within 5 basis points of the Bank of England's at the long end. At the short end, the results suggest that REPO market data is inconsistent gilts market data.

Suggested Citation

  • Hackworth, J.F., 2008. "Uncertainty and the yield curve," Economics Letters, Elsevier, vol. 98(3), pages 259-268, March.
    • Handle: RePEc:eee:ecolet:v:98:y:2008:i:3:p:259-268
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    References listed on IDEAS

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    1. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    2. D. C. Brody & L. P. Hughston, 2002. "Entropy and information in the interest rate term structure," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 70-80.
    3. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    4. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 495-514.
    5. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    6. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," FRB Atlanta Working Paper 97-10, Federal Reserve Bank of Atlanta.
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    Cited by:

    1. Ganchev, Alexander, 2023. "The Behaviour of Chinese Government Bond Yield Curve before and during the COVID-19 Pandemic," MPRA Paper 117626, University Library of Munich, Germany.

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