@article {Blitz120,
author = {Blitz, David},
title = {The Risk-Free Asset Implied by the Market: Medium-Term Bonds instead of Short-Term Bills},
volume = {46},
number = {8},
pages = {120--132},
year = {2020},
doi = {10.3905/jpm.2020.1.166},
publisher = {Institutional Investor Journals Umbrella},
abstract = {In empirical tests of the capital asset pricing model, the theoretical risk-free asset is typically assumed to be 1-month Treasury bills. This article examines the implications of a misspecified risk-free asset{\textemdash}that is, the possibility that the true risk-free asset is a longer-maturity Treasury bond. A simple theoretical derivation leads to the testable prediction that low-beta (high-beta) stocks should then exhibit positive (negative) bond betas. The author finds strong empirical confirmation for these predictions. The market-implied risk-free asset can be pinpointed at medium-term (5-year) bonds. Concrete implications of this finding are a lower equity risk premium and a less steep security market line.TOPICS: Portfolio theory, portfolio construction, derivativesKey Findings{\textbullet} In empirical tests of the capital asset pricing model, the theoretical risk-free asset is typically assumed to be 1-month Treasury bills. This article examines the implications of a misspecified risk-free asset{\textemdash}that is, the possibility that the true risk-free asset is a longer-maturity Treasury bond.{\textbullet} A simple theoretical derivation leads to the testable prediction that low-beta (high-beta) stocks should then exhibit positive (negative) bond betas.{\textbullet} The author finds strong empirical confirmation for these predictions and can pinpoint the market-implied risk-free asset at medium-term (5-year) bonds. Concrete implications of this finding are a lower equity risk premium and a less steep security market line.},
issn = {0095-4918},
URL = {https://jpm.pm-research.com/content/46/8/120},
eprint = {https://jpm.pm-research.com/content/46/8/120.full.pdf},
journal = {The Journal of Portfolio Management}
}