It is not just What you say, but How you say it: Why tonality matters in central bank communication

Chen Gu, Denghui Chen, Raluca Stan, Aizhong Shen

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)216-231
Number of pages16
JournalJournal of Empirical Finance
Volume68
DOIs
StatePublished - Sep 2022

Bibliographical note

Funding Information:
We thank Jason Turkiela, Dahui Li, Alexander Kurov, and the seminar participants at the University of Minnesota Duluth for helpful suggestions. The views expressed in this paper are our own. They are based on independent research and do not necessarily reflect the views of the Office of the Comptroller of the Currency, the U.S. Department of the Treasury, or any federal agency, nor has the paper been formally reviewed by any individuals within the Office of the Comptroller of the Currency, the U.S. Department of the Treasury, or any federal agency. The authors take responsibility for any errors. Chen Gu acknowledges the financial support from the National Natural Science Foundation of China (No. 91846108 , No. 71671012 ).

Publisher Copyright:
© 2022 Elsevier B.V.

Keywords

  • FOMC minutes
  • Intraday data
  • Monetary policy
  • Stock returns
  • Textual analysis
  • Tonality

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