Does Central Bank Tone Move Asset Prices?

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. When tone becomes more positive, stock prices increase, 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. Our results suggest that communication tone is a generic instrument of monetary policy, which affects asset prices through a risk-based channel.

Keywords: monetary policy, central bank communication, textual analysis, risk premia, stock returns, volatility risk, credit spreads

JEL Classification: G10, G12, E43, E44, E58