Working Paper: NBER ID: w22162
Authors: David Backus; Nina Boyarchenko; Mikhail Chernov
Abstract: We explore the term structures of claims to a variety of cash flows, namely, U.S. government bonds (claims to dollars), foreign government bonds (claims to foreign currency), inflation-adjusted bonds (claims to the price index), and equity (claims to future equity indexes or dividends). The average term structures reflect the dynamics of the dollar pricing kernel, cash flow growth, and the interaction between the two. We use an affine model to illustrate how these two components can deliver term structures with a wide range of levels and shapes. Finally, we calibrate a representative agent economy to show that the evidence we document is consistent with the equilibrium models.
Keywords: Asset Pricing; Term Structure; Risk Premiums
JEL Codes: G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| USD pricing kernel (F31) | average log excess returns (C51) |
| cash flow growth rate (D25) | average log excess returns (C51) |
| transformed pricing kernel (G13) | average log excess returns (C51) |
| pricing kernel's entropy (D49) | average log excess returns (C51) |
| pricing kernel's entropy (D49) | term spreads (G10) |
| investment horizon (G11) | term spreads (G10) |
| transformed pricing kernel (G13) | shape and level of term structures (E43) |
| state variables (C29) | expected cash flow growth (D25) |
| jumps in pricing kernel (G19) | risk premiums (G19) |
| jumps in cash flows (G19) | risk premiums (G19) |