If You Want To Know How Wild Things Can Get - Look At This

"Yesterday afternoon, my pal, Bob Pisani, passed along a paper from the NY Fed.  Here's the opening of the paper:

 

For many years, economists have struggled to explain the “equity premium puzzle”—the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”

The equity premium is usually measured as the difference between the average return on the stock market and the yield on short-term government bonds. Previous research on the size of the premium finds that it is too large for plausible levels of risk aversion.

 

"….. 80% of the equity premium"?  That's stunning.  The Fed researchers say they don't know what causes the phenomenon.  I think the explanation is rather simple, but we'll lay it out at another time when we have sufficient space."

at http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/10/29_If_You_Want_To_Know_How_Wild_Things_Can_Get_-_Look_At_This.html