秀色直播

Rong Wang

Duke University

Resolving the Zero-Beta Rate Puzzle

Date: Wednesday, January 28, 2026
Time: 11:30 am - 1:00 pm
Location: Bronfman building, Room 301

All are cordially invited to attend.

Abstract

This paper resolves a long-standing zero-beta rate puzzle鈥攖he empirical finding that estimated zero-beta rates remain persistently high across factor models. I show that this apparent robustness arises from pervasive model misspecification rather than reflecting a genuinely high risk-free rate. When a factor model fails to perfectly price assets, the zero-beta rate is no longer uniquely identified, and the standard estimator鈥攂ased on the minimum-variance zero-beta portfolio鈥攃onverges toward the mean return of the global minimum-variance portfolio as model misspecification increases. To quantify this mechanism, I introduce a new investment-based measure of model misspecification: the maximum Sharpe ratio attainable by zero-investment, zero-beta portfolios. This measure captures the economic magnitude of pricing errors and links model misspecification to empirically observable investment opportunities. Studying a comprehensive set of classical and modern factor models, I find substantial misspecification, explaining why all models yield similarly elevated zero-beta rates. Simulation analyses confirm that realistic degrees of misspecification can fully reproduce the empirical magnitude of the puzzle even when the true risk-free rate is low.