Does Central Bank Tone Move Asset Prices?

85 Pages Posted: 14 Jul 2015 Last revised: 5 Jul 2019

See all articles by Maik Schmeling

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Christian Wagner

WU Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2019

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, 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.

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

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

Suggested Citation

Schmeling, Maik and Wagner, Christian, Does Central Bank Tone Move Asset Prices? (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=2629978 or http://dx.doi.org/10.2139/ssrn.2629978

Maik Schmeling (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christian Wagner

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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