The Response of Exchange Rate to Central Bank Communication: A Textual Analysis Approach

55 Pages Posted: 25 Jun 2019

See all articles by Dinh-Vinh Vo

Dinh-Vinh Vo

Lund University - School of Economics and Management; University of Economics and Law

Date Written: May 19, 2019

Abstract

The study explores how central bank communication affects the exchange rate. The paper constructs sentiment by employing textual information from the European Central Bank press conferences. Using high frequency data, we find that a more positive/negative sentiment is associated with appreciation/depreciation of euro, and de- creasing/increasing exchange rate volatility. We apply Latent Dirichlet Allocation ap- proach to decompose central bank communication into a variety of topics. The results indicate that EUR-USD responds most strongly to topics of economic growth, mone- tary policy stance central bank liquidity provision, lending activities, and risk outlook) while the response of the exchange rate mutes with historical or current economic discussion (e.g. monetary policy decision, monetary policy assessment).

Keywords: Central bank communication, exchange rate, sentiment, LDA, textual analysis

JEL Classification: G11, G12, E52, E58

Suggested Citation

Vo, Dinh-Vinh, The Response of Exchange Rate to Central Bank Communication: A Textual Analysis Approach (May 19, 2019). Available at SSRN: https://ssrn.com/abstract=3406603 or http://dx.doi.org/10.2139/ssrn.3406603

Dinh-Vinh Vo (Contact Author)

Lund University - School of Economics and Management ( email )

Tycho Brahes väg 1,
S-220 07 Lund, 223 63
Sweden

University of Economics and Law ( email )

Ho Chi Minh
Vietnam

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