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Choosing a Short-Term Risk-Free Rate Proxy

Article Quant Q&A · Author: Kian
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Summary

The document explains why a US Treasury bill is commonly used as a risk-free rate proxy: many calculations require a short-term benchmark, and bills provide a money-market maturity. Longer-dated bonds do not serve the same purpose because their maturities are measured in years rather than being short term.

It also cautions that “Euro bonds” do not form a uniform reference set. They can come from different issuers with differing credit quality, so the analyst must specify which bond is being used. The response notes that the appropriate proxy depends on the calculation and market context; for a euro-denominated analysis in Europe, a German government bond might be a more relevant choice. These are selection criteria rather than a claim that any benchmark is entirely free of risk, and the discussion does not compare specific rates or methodologies.

Key ideas

  • Short-term calculations call for a short-term benchmark such as a Treasury bill.
  • Long-maturity bonds are not equivalent to money-market rates.
  • Bonds from different issuers can have different credit risks and are not a uniform proxy.
  • Choose a benchmark that fits the currency and context of the calculation.
  • A German government bond may be a relevant proxy for some euro-area analyses.

Tags

Fixed incomeUS marketsMulti-asset
Full text
# Risk free rate proxy


# Risk free rate proxy












Why is the US 30 day t bill traditionally used as a risk free rate instead of Euro bonds for example? They are both not going to default surely?

## Answer by Alex C (score 3, accepted)

https://quant.stackexchange.com/a/21408

For many purposes we need a short term risk free rate. T-bill rates are ideal for this. Most Euro bonds have maturities measured in years, they cannot be considered "short term" or "money market" rates.

Also, Eurobonds are issued by a variety of issuers. Although generally highly rated, they may differ somewhat as to default probability. In other words they are not a good reference because of non uniformity. Which specific Eurobonds would be used ?

## Answer by arodrisa (score 2)

https://quant.stackexchange.com/a/21368

Is a proxy. Depending on what you are calculating and your considerations. If you are calculating something in EUR and in Europe you might want to use the German bond. It just depends on your own criteria.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.