Finance and Economics Discussion Series (FEDS)
August 2020
Intermeeting Rate Cuts as a Response to Rare Disasters
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.
Accessible materials (.zip)
Keywords: Rare Disasters, Equity Premium, Risk Premium, Federal Funds Futures
DOI: https://doi.org/10.17016/FEDS.2020.076
PDF: Full Paper