DP13899 Risk-Free Interest Rates

Author(s): William Diamond, Marco Grotteria, Jules H. van Binsbergen
Publication Date: July 2019
Keyword(s): Convenience Yield, Demand for Safe Assets, monetary policy, Quantitative easing
JEL(s): E41, E43, E44, G12, G21
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13899

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.