Intermeeting Rate Cuts as a Response to Rare Disasters.

This paper measures the probability of rare disasters by measuring the probability of the intermeeting federal funds rate cuts they provoke. Dif- ferentiating 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. [ABSTRACT FROM AUTHOR]