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Low Risk-Free Rates and Intertemporal Arbitrage

Author

Listed:
  • Marlon Azinovic-Yang
  • Harold L. Cole
  • Felix Kubler

Abstract

Is deficit finance free when real borrowing rates are routinely lower than growth rates? We study this question in a production-based asset-pricing model that features heterogeneous trading technologies as well as idiosyncratic and aggregate risk and can match the observed low average risk-free rate and the high market price of risk. We use our model to examine under which conditions realistic calibrations allow for (bounded) intertemporal arbitrage, that is to say, the possibility of infinite rollover of a short position. We give examples where this infinite rollover is possible. However, for our benchmark calibration that matches the high market price of risk observed in the data, rollover is impossible even if the average risk-free rate lies 3.5 percent below the average growth rate. The result is robust with respect to the introduction of permanent growth shocks.

Suggested Citation

  • Marlon Azinovic-Yang & Harold L. Cole & Felix Kubler, 2023. "Low Risk-Free Rates and Intertemporal Arbitrage," NBER Working Papers 31832, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31832
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    Cited by:

    1. Marlon Azinovic-Yang & Jan Zemlicka, 2025. "Deep Learning in the Sequence Space," CERGE-EI Working Papers wp802, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Marlon Azinovic-Yang & Jan v{Z}emliv{c}ka, 2025. "Deep Learning in the Sequence Space," Papers 2509.13623, arXiv.org.

    More about this item

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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