The Impact of Central Bank’s Verbal Interventions on Stock Exchange Indices in a Resource Based Economy: The Evidence from Russia

Abstract

This paper analyzes the intraday impact of the Bank of Russia’s verbal interventions on the Russian stock exchange indices in 2014-2015. We construct a communication index which summarizes the verbal interventions of the Bank of Russia during this period. We use GARCH-modelling on intraday data on the returns of the RTS and MICEX indices. We also take into account the price of futures contracts on the BRENT oil price as the Russian economy has a strong dependence on oil prices. We show that the verbal interventions of the Bank of Russia have a positive short-term impact on the RTS returns, but do not affect their volatility. These results contradict previous studies, which show that a central bank’s communication usually has a strong effect on the volatility of indices, but does not affect their returns. We suggest that this contradiction arises from the fact that we consider the export orientation of the economy, which has not been examined in previous studies.

Keywords: the Bank of Russia, verbal interventions, GARCH-modeling, stock exchange indices, RTS index, MICEX index

JEL Classification: E32