A note on the calculation of the risk free rate for tests of asset pricing models and event studies
: Mika Vaihekoski
: Johan Knif, Bernd Pape
: Vaasa
: 2014
: Contributions to Mathematics, Statistics, Econometrics, and Finance: Essays in Honour of Professor Seppo Pynnönen.
: ACTA WASAENSIA
: 296
: 291
: 306
: 16
: 978-952-476-522-0
: 978-952-476-523-7
: 0355-2667
: http://www.uva.fi/materiaali/pdf/isbn_978%E2%80%93952%E2%80%93476%E2%80%93523%E2%80%937.pdf
The risk-free rate has a special role in finance theory. It is the key parameter in most asset pricing models and companies’ cost of capital calculations. It is the reference point for risky asset returns, and as such, asset pricing models are typically tested using excess returns. In event studies, it is used when abnormal returns are measured using the excess market model.