Report

Risk-Free Rates and Convenience Yields Around the World

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.

Keywords: risk-free rates; convenience yields; Covered interest rate parity; options;

JEL Classification: C58; G12; G15;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2022-09-01

Number: 1032