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I have a time series of the three month interbank rate each month. I suppose that the rate is give annually. I need these interbank rates to be on a monthly basis because I want to us these rate as a proxy for the risk- free rate, so I can subtract the rates from my monthly return to get the excess rate. Let me make an example. Let`s say the monthly return of stock x in April is 6%. The interbank rate at the end of April is 3% annually. Can I simply subtract o.25%(3/12) from 6% resulting in 5.75% of excess return.

Any help would be much appreciated.

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The formula you're looking for is

Monthly rate = (1 + rate p.a.)^(1/12) – 1

Thus, from 3% p.a. you get ca. 0.247% per month. However, as you see 0.25% is a good approximation (generally, small rates give good approximation).

  • 3 Month LIBOR is quoted on annual nominal basis. 3% (nominal) annually means 3/12 x 3% = 0.75% (effective) for 3 months. Then you can use Monthly rate = (1 + 0.75%)^(1/3) – 1 = 0.2494% – base64 Jul 7 '15 at 10:15
  • I'm not sure that interbank rate is automatically 3m-LIBOR in any country and any exchange (e.g. what is LIBOR for Indian rupee?). However, it's still a good idea to precise how the interbank rate is compounded – Max Li Jul 7 '15 at 10:23

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