It Is Not Just What You Say, but How You Say It: Why Tonality Matters in Central Bank Communication

43 Pages Posted: 20 Jul 2022 Last revised: 26 Jul 2022

See all articles by Chen Gu

Chen Gu

Shanghai Business School - Research Center of Finance

Denghui Chen

FDIC

Raluca Stan

University of Minnesota - Duluth

Aizhong Shen

Shanghai Business School

Date Written: June 21, 2022

Abstract

This paper investigates the stock market reaction to the tone of central bank communication. We use textual analysis techniques to measure the tonality of the FOMC minutes’ text and show that a more optimistic tonality has a positive impact on stock returns. This positive effect is prevalent during times of high monetary policy uncertainty and comes mainly from the effect tonality has on risk premium and growth expectations. Our results show that the FOMC minutes are an effective central bank communication tool, particularly during times of high policy uncertainty.

Keywords: FOMC Minutes; Monetary Policy; Textual Analysis; Stock Returns; Tonality; Intraday data

JEL Classification: G10, G12, G13, G14

Suggested Citation

Gu, Chen and Chen, Denghui and Stan, Raluca and Shen, Aizhong, It Is Not Just What You Say, but How You Say It: Why Tonality Matters in Central Bank Communication (June 21, 2022). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4158600

Chen Gu

Shanghai Business School - Research Center of Finance ( email )

Shanghai
China

Denghui Chen (Contact Author)

FDIC ( email )

550 17th Street NW
Washington, DC 20429

Raluca Stan

University of Minnesota - Duluth ( email )

1049 University Drive
Duluth, MN 55812
United States

Aizhong Shen

Shanghai Business School

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