Risk-Free Rates and Convenience Yields Around the World

Abstract

We infer risk-free rates from index option prices to estimate safe asset convenience yields in 10 G11 currencies. Countries' convenience yields increase with the level of their interest rates, with US convenience yields fifth largest. During financial crises, convenience yields grow, but the difference between US and foreign convenience yields generally does not. Covered interest parity (CIP) deviations using our option-implied rates are a similar size between the US and each other country. A model where convenience yields depend on domestic financial intermediaries, but CIP deviations reflect the funding costs of international arbitrageurs financed with dollar-denominated debt, explains these results.