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The True Risk-free Rate: A Gateway to Bond Risk

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  • Nie, George Y.

    (Concordia University)

Abstract

This study argues that a future payment’s risk approaches zero as maturity approaches zero. We employ two factors to model the risk-free rate (which is captured by the central bank’s short-term interest rate) that the market expects the current monetary policy to move towards the neutral level over a certain period. Our 3-factor final model thus splits recent US and Canada T-bill yields into the risk and risk-free rate, explaining 97% of the yields, providing a gateway to bond risk.

Suggested Citation

  • Nie, George Y., 2024. "The True Risk-free Rate: A Gateway to Bond Risk," SocArXiv 2dazg, Center for Open Science.
    • Handle: RePEc:osf:socarx:2dazg
    DOI: 10.31219/osf.io/2dazg
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