DP13490 Does Central Bank Tone Move Asset Prices?

Author(s): Maik Schmeling, Christian Wagner
Publication Date: January 2019
Keyword(s): central bank communication, credit spreads, monetary policy, risk premia, Stock returns, textual analysis, volatility risk
JEL(s): E43, E44, E58, G10, G12
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13490

This paper shows that changes in the tone of central bank communication have a significant effect on asset prices. Tone captures how the central bank frames economic fundamentals and its monetary policy. When tone becomes more positive, stock prices increase, and more so for stocks with high systematic risk, whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for fundamentals, policy actions, and other features of central bank communication, which suggests that tone is a generic instrument of monetary policy that can affect risk premia embedded in asset prices.