The Zero Beta Interest Rate

Department: Finance

Speaker: Sebastian Di Tella (Stanford)

Room: T022

Abstract

We use equity returns to construct a time-varying measure of the interest
rate that we call the zero-beta rate: the expected return of a stock portfo-
lio orthogonal to the stochastic discount factor. The zero-beta rate is high and
volatile. In contrast to safe rates, the zero-beta rate fits the aggregate consump-
tion Euler equation remarkably well, both unconditionally and conditional on
monetary shocks, and can explain the level and volatility of asset prices. We
claim that the zero-beta rate is the correct intertemporal price.