TY  - JOUR
AU  - Backus,David K.
AU  - Zin,Stanley E.
TI  - Reverse Engineering the Yield Curve
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4676
PY  - 1994
Y2  - March 1994
UR  - http://www.nber.org/papers/w4676
L1  - http://www.nber.org/papers/w4676.pdf
N1  - Author contact info:
David Backus
Stern School of Business
NYU
44 West 4th Street
New York, NY 10012-1126
Tel: 212/998-0873
Fax: 212/995-4221
E-Mail: dbackus@stern.nyu.edu

Stanley E. Zin
Department of Economics
Leonard N. Stern School of Business
New York University
44 West 4th Street, Suite 7-91
New York, NY 10012-1126
Tel: 212/998-0121
E-Mail: stan.zin@nyu.edu
AB  - 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-factor 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.
ER  -