Central banks regularly communicate their assessment of the economic
landscape and their plans to negotiate it. They set great store by these
communications, as they have realised how increasingly influential they can be.
Their press conferences are avidly followed by market participants and the
financial press, and though the content of the messages is obviously of great
interest, the tone in which it is presented is also closely studied. This joint
research from Cass Business School and Copenhagen Business
School explores how the tone of these conferences may affect
prices in equity, government bond and other asset markets.
Press conferences held by the European Central Bank (ECB) are the main focus
of this study. These conferences are broadcast live and therefore market
participants can absorb and respond to the information imparted in real
To evaluate the tone of an ECB statement, the researchers identified
negative words within it with reference to a financial dictionary. The
prevalence of these words was then assessed, and a score assigned to the
statement quantifying its positive/negative tone. This procedure was repeated
for each subsequent ECB statement until a time-series formed, against which
price changes could be measured. The sample covers a total of 185 press
conferences between January 1999 and October 2014.
The results demonstrate a strong link between the tone of the ECB
announcements and equity returns. On the day of the press conference, a
positive tone (when compared to the previous press conference), is associated
with increasing stock prices, and a negative tone is associated with a fall in
prices. The effect is statistically significant, economically sizeable, and
persists over the cycle to the next press conference.
Government bond prices were also seen to be affected by changes in the tone
of ECB announcements. A positive tone could be linked to a higher level and a
more pronounced hump of the yield curve.
The research posits that tone affects asset prices via their risk premium
component. A more positive ECB tone appears to increase equity prices and bond
yields because it reassures market participants and lowers their risk aversion.
In line with this conjecture , the paper finds that tone changes are
significantly related to asset prices that are very sensitive to changes in
risk aversion, such as variance risk premia and corporate credit spreads.
Overall, the results suggest that the ECB, and other central banks, can to some
extent manage market expectation and risk appetite through the calculated tone
of their communications.