1887

n Journal of Contemporary Management - The suitability of South African risk-free rate proxies

Volume 13 Number 1
  • ISSN : 1815-7440

Abstract

The aim of this study is to interrogate the suitability of the most common risk-free rate proxies used in South Africa compared to their American equivalents. The theoretical requirements for a risk-free asset are identified and the historical price of each proxy is tested to evaluate how they conform to each of these requirements using a variety of econometric approaches. While the American short-term rate closely satisfies the majority of the theoretical requirements, we find that the South African securities fail to meet these criteria with the South African Treasury bill rate in particular exhibiting greater variation and a volatility risk premium. The medium-term Treasury bond, currently favoured by practitioners, is thus found to be a more appropriate proxy for the risk-free asset in South Africa. These results challenge the current orthodoxy amongst academics and researchers in South Africa of using the short-term Treasury-bill rate.

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/content/jcman/13/1/EJC195599
2016-01-01
2019-07-23

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