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

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  • Gu, Chen
  • Chen, Denghui
  • Stan, Raluca
  • Shen, Aizhong

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.

Suggested Citation

  • Gu, Chen & Chen, Denghui & Stan, Raluca & Shen, Aizhong, 2022. "It is not just What you say, but How you say it: Why tonality matters in central bank communication," Journal of Empirical Finance, Elsevier, vol. 68(C), pages 216-231.
    • Handle: RePEc:eee:empfin:v:68:y:2022:i:c:p:216-231
    DOI: 10.1016/j.jempfin.2022.07.008
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    More about this item

    Keywords

    FOMC minutes; Monetary policy; Textual analysis; Stock returns; Tonality; Intraday data;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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