Authors: William Diamond and Peter Van Tassel
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Staff Reports
Risk-Free Rates and Convenience Yields Around the World
Number 1032
September 2022 Revised February 2023
September 2022 Revised February 2023
JEL classification: G12, G15, C58
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.
Author Disclosure Statement(s)
William Diamond
I declare that I have no relevant or material financial interests that relate to the research described in this paper.
Peter Van Tassel
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at: https://www.newyorkfed.org/research/staff_reports/index.html.
I declare that I have no relevant or material financial interests that relate to the research described in this paper.
Peter Van Tassel
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at: https://www.newyorkfed.org/research/staff_reports/index.html.
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