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Entropy and information in the interest rate term structure

Author

Listed:
  • D. C. Brody
  • L. P. Hughston

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:taf:quantf:v:2:y:2002:i:1:p:70-80
    DOI: 10.1088/1469-7688/2/1/306
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    Cited by:

    1. Gzyl, Henryk & Mayoral, Silvia, 2016. "Determination of zero-coupon and spot rates from treasury data by maximum entropy methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 456(C), pages 38-50.
    2. Hawkins, Raymond J. & Aoki, Masanao & Roy Frieden, B., 2010. "Asymmetric information and macroeconomic dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(17), pages 3565-3571.
    3. Dorje C. Brody & Lane P. Hughston, 2013. "Social Discounting and the Long Rate of Interest," Papers 1306.5145, arXiv.org, revised Sep 2015.
    4. Hackworth, J.F., 2008. "Uncertainty and the yield curve," Economics Letters, Elsevier, vol. 98(3), pages 259-268, March.
    5. Frieden, B. Roy & Hawkins, Raymond J., 2010. "Asymmetric information and economics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(2), pages 287-295.
    6. El Karoui, Nicole & Jeanblanc, Monique & Jiao, Ying, 2010. "What happens after a default: The conditional density approach," Stochastic Processes and their Applications, Elsevier, vol. 120(7), pages 1011-1032, July.

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