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Risk-Free Rates and Convenience Yields Around the World

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Abstract

We infer risk-free rates from index option prices to estimate safe asset convenience yields in ten G-11 currencies. Countries' convenience yields increase linearly with the level of their interest rates, with U.S. convenience yields being the fifth largest. During financial crises, convenience yields grow, but the difference between U.S. and foreign convenience yields generally does not. Covered interest parity (CIP) deviations using our option-implied rates are roughly the same size between the U.S. and each other country. A model where convenience yields depend on domestic financial intermediaries, but CIP deviations depend on international arbitrageurs funded with wholesale dollar-denominated debt, explains these results.

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  • William Diamond & Peter Van Tassel, 2022. "Risk-Free Rates and Convenience Yields Around the World," Staff Reports 1032, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:94750
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    References listed on IDEAS

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    More about this item

    Keywords

    risk-free rates; convenience yields; Covered interest rate parity; options;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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