Towards a Common European Monetary Union Risk Free Rate

We present a tentative estimate of a common risk free rate for the European Monetary Union countries from January 2004 to December 2010 using variables motivated by a theoretical portfolio selection model. In a first stage, we analyze the determinants of EMU sovereign yield spreads and find significant effects of the credit quality, macro, correlation, liquidity and interaction variables. Then, on the basis of the yield spreads' determinants, we estimate the common risk free rate and show that this rate would imply, in most cases, average savings in borrowing costs for all the countries involved although under some extreme market circumstances, some countries may suffer increased borrowing costs