Abstract: We document differing risk-free rates in a range of asset classes, providing a uniquely clean measure of segmentation between markets. The asset markets we consider are the government bond market, commodity markets for precious metals, exchange rate markets and option markets. We find that risk-free rates across markets can deviate for prolonged periods of time and we characterize market segmentation through the speed of convergence. We analyze how shocks propagate across rate spreads and develop an aggregate arbitrage index which captures the common variation of these spreads across markets. We further present a novel high-frequency measure of the convenience yield on government bonds, which equals 38 basis points on average and grows substantially during periods of financial distress. We argue that option-market-implied risk-free rates provide a convenience-yield-free and effectively credit-risk-free measure of time preference measured accurately at a minutely frequency. This makes such rates a strong candidate for the risk free benchmark rate and we explore a range of empirical asset pricing applications.
William Diamond, Safety Transformation and the Structure of the Financial System, (R&R Journal of Finance).
FNCE100 - Corporate Finance
This course provides an introduction to the theory, the methods, and the concerns of corporate finance. The concepts developed in FNCE 100 form the foundation for all elective finance courses. The main topics include: 1) the time value of money and capital budgeting techniques; 2) uncertainty and the trade-off between risk and return; 3) security market efficiency; 4) optimal capital structure, and 5) dividend policy decisions. During the Fall semester there are honors sections of FNCE 100 offered. The seats in the honors sections are awarded through an application process. Please go to: https://fnce.wharton.upenn.edu/programs/course-applications for additional information. Corporate Finance is a Core course and must be taken for a grade.