Central Bank Communication and Asset Correlation

Abstract

In this paper, I investigate the effect of Fed and ECB communications on the long-run stock-bond and stock-FX correlations. I find that a negative tone in central banks’ communication results to a lower stock-bond correlation, which supports the flight to quality phenomenon in both US and Euro area. In contrast, results for stock-FX correlation are mixed. Fed’s negative sentiment leads to opposite movements of US stock prices and USD, while ECB’s negative sentiment drives Eurozone stock prices and EUR moving in the same direction. This result documents for safe haven property of USD.

Keywords: Central bank, text analysis, asset correlation, currency, monetary policy

JEL Classification: E52, F31, G12