Electronic – Duty cycle to voltage converter

The first thing I'd look at is ripple in your voltage rail. Noisy voltages are killer with a voltage divider. A higher-quality measurement system might use a regulated constant current source to drive the RTD instead of a voltage divider. An LM317 can be used to do this - hook a resistor between the OUTPUT and ADJ terminal, and hook the RTD between ADJ and GND. The value of the resistor between output and adjust will set the current going through the RTD - use a precise resistor to be certain of the amount of current.

Otherwise, attempt to do the filtering in hardware if possible. You first have to figure out where the noise is coming from to make it effective. Determine what frequencies of noise you're seeing and then probe at the input to the gain stage, the output, and the input to the ADC. If there's noise everywhere, then it's in the source, otherwise it's being injected somewhere else. Make sure all of your IC's have bypass capacitors to start with. Then make sure that you don't have any long ground loops - make everything as direct (high current) of a connection to ground as possible. Don't daisy chain grounds - everything should get its own connection to ground that doesn't run through other chips.

If you're seeing noise at the source, chances are it's your voltage source for the divider. To combat this, you could put a capacitor in parallel with the RTD to make a simple filtering circuit. Just figure out what frequencies of noise you're seeing and match the capacitor to the resistance of the RTD and figure it out.

Would the change in Duty Cycle of current translate into change in duty cycle of Voltage if a resistor is attached at the output of the sensor?

yes, of course

Given such a case, what's the deciding factor for Sinking output vs Sourcing output?

If you have an output with a full driver (not for instance an open collector / sink only driver) you could attach the resistor to ground to get a voltage signal that is time-wise identical to your current signal (high when current is is sourced), or you could attach the resistor to Vcc to get the inverse (low when current is sunken). What to prefer is a matte of system design.

My guess is that you have an open-collector type sensor, in which case you will have to connect a resistor to Vcc, because the sensor can only sink current.

BTW, are you sure it is the duty cycle you are interested in? Wheel speed sensors are often of the magnet/hall-sensor or LED/fototodiode type, which produce pulses at a frequency proportional to the speed. The duty cycle may change too, but is in most cases not what you should be measuring.