Entropy and information in the interest rate term structure

D. C. Brody and L. P. Hughston

Quantitative Finance, 2002, vol. 2, issue 1, 70-80

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.

Date: 2002
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DOI: 10.1088/1469-7688/2/1/306

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