Central Bank Communication and Asset Correlation

39 Pages Posted: 28 Jan 2021

Date Written: September 30, 2020

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

Suggested Citation

Hoang, Duc Hong, Central Bank Communication and Asset Correlation (September 30, 2020). Available at SSRN: https://ssrn.com/abstract=3744800 or http://dx.doi.org/10.2139/ssrn.3744800

Duc Hong Hoang (Contact Author)

Lund University ( email )

Box 117
Lund, SC Skane S221 00
Sweden

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