Is it possible to use a bond index as a proxy for Rf in CAPM? Please let me know what is the issue here.
Bond index is a composition of government bonds, municipal bonds, corporate bonds, high-yield bonds, mortgage-backed securities, syndicated or leveraged loans, etc. Whereas Rf is risk free rate is typically equal to the yield on a 10-year US government bond,which is essentially risk free unlike bond index. Using bond index would not lead to an accurate CAPM.
It depends on how you define the risk-free rate and you should be able to show persuading reasons once you choose a rate to be risk-free , whatever Libor rate or Treasury rate or others. I remember in CAPM, the risk-free rate also represents the rate at which an investor can lend or borrow money without committing losses to build an efficient portfolio, so this rate should in theory be not volatile, a bond index would not fit this requirement I think.