Uncertainty and the yield curve

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.