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The Zero-Beta Interest Rate

Journal of Political Economy 2026 134(7), 2074-2118
We use equity returns to construct a time-varying measure of the zero-beta interest rate: the expected return of a stock portfolio orthogonal to the stochastic discount factor. In contrast to safe rates, the zero-beta rate fits the aggregate consumption Euler equation remarkably well both unconditionally and conditional on monetary policy shocks and is high, volatile, and persistent enough to explain the average return and most of the volatility of the market portfolio. The puzzle is why safe rates are so low, stable, and disconnected from both consumption and the zero-beta rate.