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Does Central Bank Tone Move Asset Prices?

Published online by Cambridge University Press:  08 February 2024

Maik Schmeling Open the ORCID record for Maik Schmeling [Opens in a new window]  and
Christian Wagner Open the ORCID record for Christian Wagner [Opens in a new window]
Maik Schmeling
Affiliation:
Goethe University Frankfurt and Centre for Economic Policy Research (CEPR) [email protected]
Christian Wagner*
Affiliation:
WU Vienna University of Economics and Business, Vienna Graduate School of Finance (VGSF) and Centre for Economic Policy Research (CEPR)
*
[email protected] (corresponding author)
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Abstract

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This article 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. A positive tone surprise is associated with increases in stock prices and interest rates, whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for policy actions as well as for conventional measures of monetary policy shocks. Our results suggest that communication tone is a powerful instrument of monetary policy, which affects risk premia embedded in asset prices.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 32
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank two anonymous referees, Alessandro Beber, Oliver Boguth, Jennifer Conrad (the editor), Gino Cenedese, Zhi Da, Marco Di Maggio, Chris Downing, Michael Ehrmann, Rainer Haselmann, Tarek Hassan, Marcin Kacperczyk, Mark Kamstra, Anil Kashyap, Ralph Koijen, Holger Kraft, Tim Kroencke, David Lando, Christian Laux, Michael Lemmon, Tim Loughran, Mamdouh Medhat, Michael Melvin, Alex Michaelides, Menno Middeldorp, Silvia Miranda-Agrippino, Philippe Mueller, Thomas Nagel, Florian Nagler, Evgenia Passari, Lasse Pedersen, Tarun Ramadorai, Jesper Rangvid, Lucio Sarno, Christian Schlag, Andreas Schrimpf, Vania Stavrakeva, Andrea Tamoni, Pietro Veronesi, Anette Vissing-Jorgensen, Desi Volker, Paul Whelan, Fredrik Willumsen, and participants at the 2017 American Finance Association (AFA) Meetings, 2016 Western Finance Association (WFA) Meetings, the 2016 SFS Cavalcade, the 2016 INQUIRE UK Conference, the 2015 London Empirical Asset Pricing (LEAP) Meeting, and the 2015 European Finance Association (EFA) Meetings, as well as seminar participants at Aarhus University, Aalto University, the Bank for International Settlements, Bank of England, the Board of Governors of the Federal Reserve System, BlackRock, Copenhagen Business School, the German Institute for Economic Research (DIW, Berlin), Norges Bank, Norges Bank Investment Managers, Sveriges Riksbank, Goethe University Frankfurt, and the Vienna Graduate School of Finance (VGSF) for helpful comments and suggestions. Wagner acknowledges support by the Danish National Research Foundation (DNRF102). Schmeling gratefully acknowledges financial support by the German Science Foundation (DFG).

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