The End of the Risk-Free Rate: Investing When Structural Forces Change Government Debt

Chapter 4Some Quantification

The risk-free rate was traditionally characterized by high liquidity, low default, and perceived safety. That idea has changed. Investors now have to analyze credit risk attributes of the risk-free rate, something that was not done before. These attributes can be broken down into two major categories, fundamental and technical. Fundamental speaks to a host of economic, country, and debt risk metrics. Technical factors are related to liquidity, default, credit, and currency risk. Underneath are subsectors such as policy, social-political, financial repression, and liquidity traps. When incorporating these into a framework, the picture becomes more complex as more types of risk are added, as shown in Figure 4.1 on ...