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Entropy and information in the interest rate term structure

  • D. C. Brody
  • L. P. Hughston
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    Associated with every positive interest term structure there is a probability density function over the positive half-line. This fact can be used to turn the problem of term structure analysis into a problem in the comparison of probability distributions, an area well developed in statistics, known as information geometry. The information-theoretic and geometric aspects of term structures thus arising are here illustrated. In particular, we introduce a new term structure calibration methodology based on maximization of entropy, and also present some new families of interest rate models arising naturally in this context.

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    File URL: http://www.tandfonline.com/doi/abs/10.1088/1469-7688/2/1/306
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    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 2 (2002)
    Issue (Month): 1 ()
    Pages: 70-80

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    Handle: RePEc:taf:quantf:v:2:y:2002:i:1:p:70-80
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