Central Bank Tone and Currency Risk Premia

39 Pages Posted: 5 Jan 2019 Last revised: 18 Jan 2020

See all articles by Asad Dossani

Asad Dossani

Colorado State University, Fort Collins - College of Business

Date Written: September 14, 2018

Abstract

I analyze how the tone of central bank press conferences impacts risk premia in the currency market. I measure tone as the difference between the number of hawkish and dovish phrases made during a press conference. I show that central bank tone contemporaneously explains option implied risk aversion, and predicts future variance swap returns. A one standard deviation increase in the hawkishness of a press conference increases option implied risk aversion by 1.5%, and reduces the one month variance swap return by 4.5% per year, relative to the average of -28.8% per year. In addition, I show that the impact of tone on currency markets comes primarily from the questions and answers, or the unscripted portion of the press conference.

Keywords: Monetary Policy, Risk Aversion, Exchange Rates

JEL Classification: G15, E5

Suggested Citation

Dossani, Asad, Central Bank Tone and Currency Risk Premia (September 14, 2018). Available at SSRN: https://ssrn.com/abstract=3304785 or http://dx.doi.org/10.2139/ssrn.3304785

Asad Dossani (Contact Author)

Colorado State University, Fort Collins - College of Business ( email )

Fort Collins, CO 80523
United States

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