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The Risk-free Rate and the Risk-adjusted Growth Rate
Stavros Panageas
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Working Paper 35260
DOI 10.3386/w35260
Issue Date May 2026
Several important questions — such as the possibility of debt-rollover without primary surpluses — turn on whether the present value of the aggregate endowment is finite, i.e., whether the economic growth rate under the “risk-neutral” measure, lies below the risk-free rate. It is tempting to argue that the endowment must be finitely valued, since there exist finitely-valued, non-depreciating assets whose cash flows are cointegrated with aggregate output. This paper shows why this argument is incorrect. A remarkable historical episode in which French government bonds were indexed to aggregate growth allows direct measurement of the risk-adjusted growth rate, which is found to exceed the risk-free rate.
Acknowledgements and Disclosures
I thank Ravi Bansal, Lars Peter Hansen, Lorenzo Garlappi, Nicolae Garleanu, Francois Gourio, Martin Lettau, Erik Loualiche, Rodolfo Prieto, Dejanir Silva, Mindy Xiaolan and conference and seminar participants at Arizona State University, Cleveland Fed, City University of Hong Kong, Colorado Finance Summit, Hong Kong University, Hong Kong University of Science and Technology, Insead, London Business School, Macro-Finance Society, Oslo Center for Advanced Studies, SFS Cavalcade, University of British Columbia, University of California Los Angeles, Utah Winter Finance Conference, and Western Finance Association for useful comments. A previous version of the paper was circulated under the title ``Growth-Indexed Securities''. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
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Stavros Panageas, "The Risk-free Rate and the Risk-adjusted Growth Rate," NBER Working Paper 35260 (2026), https://doi.org/10.3386/w35260.
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