Reverse Engineering the Yield Curve

Posted: 14 Sep 1999

See all articles by David K. Backus

David K. Backus

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Stanley E. Zin

Carnegie Mellon University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1994

Abstract

Prices of riskfree bonds in any arbitrage-free environment are governed by a pricing kernel: given a kernel, we can compute prices of bonds of any maturity we like. We use observed prices of multi-period bonds to estimate, in a log- linear theoretical setting, the pricing kernel that gave rise to them. The high-order dynamics of our estimated kernel help to explain why first-order, one-fact models of the term structure have had difficulty reconciling the shape of the yield curve with the persistence of the short rate. We use the estimated kernel to provide a new perspective on Hansen-Jagannathan bounds, the price of risk, and the pricing of bond options and futures.

JEL Classification: E43, G12, G13

Suggested Citation

Backus, David K. and Zin, Stanley E., Reverse Engineering the Yield Curve (March 1994 ). Available at SSRN: https://ssrn.com/abstract=5615

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HOME PAGE: http://pages.stern.nyu.edu/~dbackus/

Stanley E. Zin

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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