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

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. [Display omitted] •This is the first article to assess whether the Risk-free Asset exists in practice.•Uses the most common measures of the Risk-Free Rate: T-bills, Overnight Index Swaps, and Interbank Offered Rates.•Covers data on equity markets and gold for the UK, US, China, Japan and India.•Gold is found to be a proxy for the Risk-free Asset in the UK and China, and T-Bills for Japan.•But no asset qualifies as Risk-free across all countries making implementing CAPM or other common asset pricing models more difficult.