Risk-Free Rates and Convenience Yields Around the World

William Diamond and Peter Van Tassel

No 1032, Staff Reports from Federal Reserve Bank of New York

Abstract: We infer risk-free rates from index option prices to estimate safe asset convenience yields in ten G-11 currencies. Countries' convenience yields increase linearly with the level of their interest rates, with U.S. convenience yields being the fifth largest. During financial crises, convenience yields grow, but the difference between U.S. and foreign convenience yields generally does not. Covered interest parity (CIP) deviations using our option-implied rates are roughly the same size between the U.S. and each other country. A model where convenience yields depend on domestic financial intermediaries, but CIP deviations depend on international arbitrageurs funded with wholesale dollar-denominated debt, explains these results.

Keywords: risk-free rates; convenience yields; Covered interest rate parity; options (search for similar items in EconPapers)
JEL-codes: C58 G12 G15 (search for similar items in EconPapers)
Pages: 67
Date: 2022-09-01
New Economics Papers: this item is included in nep-fmk
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