3-month or 1-month Treasury bill yields are typically used as proxies for the risk-free rate. However, it is often the case that - especially for developing economies - that data is only available at weekly or monthly frequency. This raises the question of whether an end-of-the-month yield on a 3-month Treasury bill for a given month would be a good proxy for daily yields within that month. Basically I would compute the daily yield $r_d$ for all days $d$ belonging to month $m$ from the monthly 3-month yield in that month: $r_m$

$(1+r_m)^{1/20} = 1 + r_d$

In the weekly case we would divide by 5 instead of 20.

The objective is to get an estimate of the risk-free rate to compute excess returns in an international setting.

Other alternatives would include interbank rates but daily data is often scarce as well.

My question is whether this is a viable option to estimate daily risk-free rates or whether this is likely to just introduce noise in the computation of excess returns (maybe simply working with returns would be a superior approach).

  • $\begingroup$ Be careful that in my experience yields on 3 month securities are expressed in ANNUAL (not monthly) terms. (What country are you dealing with, BTW?). Then r/365 is a first order approximation of the return you earn in a day (the capital gains/losses are minimal for such short term securities and can be (and usually are) neglected). Updating the rate r every month or week is fine. $\endgroup$ – noob2 Dec 12 '17 at 13:58

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