On the Calculation of the Risk Free Rate for Tests of Asset Pricing Models
17 Pages Posted: 22 Jan 2007 Last revised: 31 Aug 2009
Date Written: August 27, 2009
Abstract
The risk free rate is one of the most often used data series in empirical tests of financial theories. This paper discusses issues in calculating risk free rates from the money market instruments, especially for tests of asset pricing models and event studies. Special attention is given to situations where the maturity of the money market instruments does not match that of the other assets under investigation. This situation typically arises when one has to calculate risk free rates of return for periods shorter (e.g., a day or a week) than the shortest available market rates (e.g., one month) or when the available instruments are issued periodically (e.g., once a week) with fixed maturity.
Keywords: risk free rate, money market, asset pricing tests, event studies, CRSP, Euribor, T-bill
JEL Classification: G10, G12
Suggested Citation: Suggested Citation
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