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Intermeeting Rate Cuts as a Response to Rare Disasters

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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.

Suggested Citation

  • David S. Miller, 2020. "Intermeeting Rate Cuts as a Response to Rare Disasters," Finance and Economics Discussion Series 2020-076, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2020-76
    DOI: 10.17016/FEDS.2020.076
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    References listed on IDEAS

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    7. Uri Carl & Anthony M. Diercks, 2019. "A Simple Macro-Finance Measure of Risk Premia in Fed Funds Futures," FEDS Notes 2019-01-08, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    Keywords

    Rare disasters; Equity premium; Risk premium; Federal funds futures;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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