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Negative Risk Free Rate Sharpe Ratio

Economics Asked by user29948 on June 18, 2021

currently I am writing my Master-Thesis about SRI-Fonds. For analysing Sharpe Ratios from different Fonds I need to use the risk free rate (e.g. Euribor 3M). Unfortunately I can‘t find anything about dealing with negative risk free rates. Is it useful to calculate with those negative rates or should I prefer a risk free rate about 0% in case it‘s negative?

Thanks a lot for your answers.
Maybe someone had the same problem before…

One Answer

You should be fine to use negative interest rates for the risk-free rate when calculating a Sharpe ratio. If rates are negative, they are negative. That does not change the calculation of excess returns.

One point, however: EURIBOR and EONIA are interbank rates and thus are not risk-free but have a small credit spread above risk-free rates. The latest ECB recommendations call for €STR to become a risk-free overnight rate with a transition planned to set EONIA := €STR+8.5 bp going forward.

Answered by kurtosis on June 18, 2021

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