Options for Calculating Risk-Free Rates

Posted: 2 Oct 2023

See all articles by Jules H. van Binsbergen

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

William Diamond

University of Pennsylvania - Finance Department

Peter Van Tassel

Independent

Date Written: October 2, 2023

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.

To view post: https://libertystreeteconomics.newyorkfed.org/2023/10/options-for-calculating-risk-free-rates/

Keywords: risk-free rate, Treasuries, convenience yield

JEL Classification: G1

Suggested Citation

van Binsbergen, Jules H. and Diamond, William and Van Tassel, Peter, Options for Calculating Risk-Free Rates (October 2, 2023). Liberty Street Economics , Available at SSRN: https://ssrn.com/abstract=4590086

Jules H. Van Binsbergen

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

William Diamond

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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