Working Paper: CEPR ID: DP13490
Authors: Maik Schmeling; Christian Wagner
Abstract: This paper shows that changes in the tone of central bank communication have a significant effect on asset prices. Tone captures how the central bank frames economic fundamentals and its monetary policy. When tone becomes more positive, stock prices increase, and more so for stocks with high systematic risk, whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for fundamentals, policy actions, and other features of central bank communication, which suggests that tone is a generic instrument of monetary policy that can affect risk premia embedded in asset prices.
Keywords: Monetary Policy; Central Bank Communication; Textual Analysis; Risk Premia; Stock Returns; Volatility Risk; Credit Spreads
JEL Codes: G10; G12; E43; E44; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive central bank tone (E52) | Increased stock prices (G19) |
| Positive central bank tone (E52) | Lower volatility risk premia (G19) |
| Positive central bank tone (E52) | Decline in credit spreads (G19) |
| Higher systematic risk stocks respond more to tone changes (G41) | Increased stock prices (G19) |