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Discussion Paper Details

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Title: Risk-Free Interest Rates

Author(s): William Diamond, Marco Grotteria and Jules H. van Binsbergen

Publication Date: July 2019

Keyword(s): Convenience Yield, Demand for Safe Assets, monetary policy and Quantitative easing

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: We estimate risk-free interest rates unaffected by convenience yields on safe assets. We infer them from risky asset prices without relying on any specific model of risk. We obtain a term structure of convenience yields with maturities up to 2.5 years at a minutely frequency. The convenience yield on treasuries equals about 40 basis points, is larger below 3 months maturity, and quadruples during the financial crisis. In high-frequency event studies, conventional and unconventional monetary stimulus reduce convenience yields, particularly during the crisis. We further study convenience-yield-free CIP deviations, and we show significant bond return predictability related to convenience yields.

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Bibliographic Reference

Diamond, W, Grotteria, M and van Binsbergen, J. 2019. 'Risk-Free Interest Rates'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13899