City Research Online

Abstract

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. A positive tone surprise is associated with increases in stock prices and interest rates whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for policy actions as well as for conventional measures of monetary policy shocks. Our results suggest that communication tone is a powerful instrument of monetary policy, which affects risk premia embedded in asset prices.

Publication Type:	Article
Additional Information:	This article has been published in a revised form in Journal of Financial and Quantitative Analysis http://10.1017/s0022109024000073. This version is free to view and download for private research and study only. Not for re-distribution or re-use. © The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Publisher Keywords:	Monetary policy, central bank communication, textual analysis, risk premia, stock returns, volatility risk, credit spreads.
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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