Can Forward Guidance Influence Market Expectations? - Text Mining Approach

34 Pages Posted: 18 Aug 2017

See all articles by Shintaro Suda

Shintaro Suda

Mitsubishi UFJ Trust Investment Technology Institute Co., Ltd.

Ryo Ito

University of Tokyo - School of Engineering

Kiyoshi Izumi

University of Tokyo - School of Engineering

Date Written: August 17, 2017

Abstract

The forward guidance provided by central banks is regarded as an essential new monetary policy tool which influences market expectations under the recent low interest rates. This research investigates whether U.S. forward guidance shapes market expectations by using the assets’ price formation after the Federal Open Market Committee (FOMC) meetings. The forward guidance is communicated to market participants and released on the official Federal Reserve Board (FRB) website through textual data or the press conferences by Chair of the FRB. Therefore, when we evaluate the forward guidance, we apply the text mining framework which is developing rapidly. In this paper, we evaluate the statements and minutes that the FRB released after the FOMC meetings, using an improved version of the text mining model based on previous researches, such as Hansen and McMahon(2016) and Jagadeesh and Wu(2015). As a result of this improvement, the model which is designed specifically for FOMC analysis has a higher explanatory power to the macroeconomic statistics. Next, we investigate the relationship between the forward guidance evaluated by our text mining model and the assets’ price formation based on Schmeling and Wagner(2016). We show the forward guidance influences the assets’ price formation (market expectation), in agreement with the transmission mechanism of the forward guidance shown in the previous studies. Especially, the forward guidance on employment and inflation that is so important as to be called dual mandate in monetary policy in the United States has been found to have a significant influence on investors’ behavior.

Keywords: Forward Guidance, Expectation Formation, Text Mining

JEL Classification: G10, G12, E44, E58

Suggested Citation

Suda, Shintaro and Ito, Ryo and Izumi, Kiyoshi, Can Forward Guidance Influence Market Expectations? - Text Mining Approach (August 17, 2017). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=3021730 or http://dx.doi.org/10.2139/ssrn.3021730

Shintaro Suda (Contact Author)

Mitsubishi UFJ Trust Investment Technology Institute Co., Ltd. ( email )

2-6, Akasaka 4-Chome
Minato-ku, Tokyo 107-0052
Japan

Ryo Ito

University of Tokyo - School of Engineering ( email )

Tokyo
Japan

Kiyoshi Izumi

University of Tokyo - School of Engineering ( email )

Tokyo
Japan

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
4
Abstract Views
81
PlumX Metrics