The Risk-Free Rate: An Inescapable Concept?

Posted: 10 Feb 2016

See all articles by Michel M. Dacorogna

Michel M. Dacorogna

DEAR-Consulting

Jérôme Coulon

Zurich Insurance Company Ltd; University of Claude Bernard Lyon 1 - Institute of Finance and Insurance Science (ISFA)

Date Written: September 10, 2013

Abstract

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

Suggested Citation

Dacorogna, Michel M. and Coulon, Jérôme, The Risk-Free Rate: An Inescapable Concept? (September 10, 2013). Available at SSRN: https://ssrn.com/abstract=2730595

Michel M. Dacorogna (Contact Author)

DEAR-Consulting ( email )

Scheuchzerstrasse 160
Zurich, 8057
Switzerland
+41795447327 (Phone)

Jérôme Coulon

Zurich Insurance Company Ltd ( email )

Zurich, 8022
Switzerland

University of Claude Bernard Lyon 1 - Institute of Finance and Insurance Science (ISFA) ( email )

50, Avenue Tony Garnier
Lyon Cedex 07, 69366
France

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