Identifying proxies for risk-free assets: Evidence from the zero-beta capital asset pricing model

Abstract

This research offers the first analysis of whether gold, T-bills, Overnight Index Swaps (OIS) or Interbank Offered Rates (IBOR) can be used as proxy for the risk-free asset in the UK, US, China, Japan and India. Using Blacks (1972) Zero-Beta CAPM we apply Wald and Likelihood Ratio Tests to assess whether gold, T-bills, OIS or IBOR qualify as Zero-Beta or risk free assets against each company in FTSE 350, S&P 500, SSE 180, NIKKEI 225 and SENSEX. We find that gold is a proxy for the risk-free asset in the UK and China; T-bills are a proxy for risk-free assets in Japan and IBOR is a proxy for the risk-free rate in China. None qualify as risk free for the US market. According to our results, there is no universal risk-free asset for the UK, US, China, Japan and India.