Intermeeting Rate Cuts as a Response to Rare Disasters

David Miller

No 2020-076, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper measures the probability of rare disasters by measuring the probability of the intermeeting federal funds rate cuts they provoke. Differentiating between months with Federal Open Market Committee (FOMC) meetings and months without identifies excess returns on federal funds futures averaging -1.5 bps per horizon month-ahead at short horizons, corresponding to a 3-5% per month risk-neutral probability of an intermeeting rate cut. The excess returns differ between months with and without meetings, suggesting a positive risk premium associated with meetings. The federal funds excess returns explain a significant portion of equity excess returns, and hence the equity premium puzzle.

Keywords: Rare disasters; Equity premium; Risk premium; Federal funds futures (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Pages: 22 p.
Date: 2020-08-28
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-76

DOI: 10.17016/FEDS.2020.076

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