Options for Calculating Risk-Free Rate

William Diamond, Jules van Binsbergen () and Peter Van Tassel
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Jules van Binsbergen: https://fnce.wharton.upenn.edu/profile/julesv/

No 20231002, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: One of the most fundamental concepts in finance is the notion of a risk-free rate. This interest rate tells us how much money investors are guaranteed to receive in the future by saving one dollar today. As a result, risk-free rates reflect investors’ preferences for payoffs in the future relative to the present. Yields on U.S. Treasury securities are generally viewed as a standard benchmark for the risk-free rate, but they may also feature a “convenience yield,” reflecting Treasuries’ special, money-like properties. In this post, we estimate a risk-free rate implicit in the prices of S&P 500 index options—called the box rate—to measure investors’ time preference separate from Treasury convenience yields.

Keywords: risk-free rates; Treasuries; Convenience Yield (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2023-10-02
New Economics Papers: this item is included in nep-ban
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