Does More Complex Language in FOMC Decisions Impact Financial Markets?

31 Pages Posted: 1 Feb 2016

See all articles by Lee A. Smales

Lee A. Smales

University of Western Australia

Nicholas Apergis

University of Piraeus; University of Derby

Date Written: January 28, 2016

Abstract

This paper is built around a simple premise that is based on the theoretical models of Harris and Raviv (1993) and Kandel and Pearson (1995). Complex statements are more difficult to interpret and may be construed in different ways by different agents. This creates heterogeneity of beliefs among market participants that manifests in increased market activity. We confirm existing results that show monetary policy surprises have a significant impact on financial markets. Importantly, we demonstrate that linguistic complexity (measured in terms of readability and number of words) of FOMC statements that accompany monetary policy decisions significantly increases the trading volume, and volatility of returns, in stock, bond, and currency markets. We also establish that financial markets are more responsive to monetary policy decisions (and the language of those statements) during recession.

Keywords: Monetary policy decisions, Financial markets, Federal Reserve, Linguistic complexity, FOMC statements

JEL Classification: G1, G10, G12, G14

Suggested Citation

Smales, Lee A. and Apergis, Nicholas, Does More Complex Language in FOMC Decisions Impact Financial Markets? (January 28, 2016). Asian Finance Association (AsianFA) 2016 Conference. Available at SSRN: https://ssrn.com/abstract=2724364 or http://dx.doi.org/10.2139/ssrn.2724364

Lee A. Smales (Contact Author)

University of Western Australia ( email )

UWA Business School
35 Stirling Highway
Perth, Western Australia 6009
Australia

Nicholas Apergis

University of Piraeus ( email )

Karaoli and Dimitriou 80
80 KARAOLI & DIMITRIOU STREET
Piraeus, Attiki 18534
Greece

University of Derby ( email )

Kedleston Road
Derby, Derbyshire DE22 1GB
United Kingdom

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