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

See all articles by Mika Vaihekoski

Mika Vaihekoski

University of Turku, Turku School of Economics; University of Turku - Turku School of Economics

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

Vaihekoski, Mika and Vaihekoski, Mika, On the Calculation of the Risk Free Rate for Tests of Asset Pricing Models (August 27, 2009). Available at SSRN: https://ssrn.com/abstract=958471 or http://dx.doi.org/10.2139/ssrn.958471

Mika Vaihekoski (Contact Author)

University of Turku - Turku School of Economics ( email )

Turku, 20014
Finland

HOME PAGE: http://users.utu.fi/moovai/

University of Turku, Turku School of Economics ( email )

Turku School of Economics
Dep. of Accounting and Finance
University of Turku, 20014
Finland
+358 2 33351 (Phone)

HOME PAGE: http://users.utu.fi/moovai/

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