The Risk-Free Rate: An Inescapable Concept?
Posted: 10 Feb 2016
Date Written: September 10, 2013
The notion of risk‐free rate is essential to pricing risk in insurance, but it has been put under critics particularly when it comes to choose a benchmark for the discounting yield curve. The sovereign debt crisis has put in doubt the choice of government yield and the debate is open if choosing other benchmark would be more appropriate. In this paper, we review the concept and few alternative benchmarks including the Arrow‐Debreu model. We conclude that the swap rates could be a good alternative given its less volatile behaviour.
Keywords: valuation, risk-free-rate, discounting, risk neutral
JEL Classification: G30, G22, G12, E43, D46
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