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Monetary Policy on Twitter and its Effect on Asset Prices: Evidence from Computational Text Analysis

Author

Listed:
  • Jochen Lüdering

    () (University of Giessen)

  • Peter Tillmann

    () (University of Giessen)

Abstract

In this paper we dissect the public debate about the future course of monetary policy and trace the effects of selected topics of this discourse on U.S. asset prices. We focus on the “taper tantrum” episode in 2013, a period with large revisions in expectations about Fed policy. Based on a novel data set of 90,000 Twitter messages (“tweets”) covering the entire debate of Fed tapering on Twitter we use Latent Dirichlet Allocation, a computational text analysis tool to quantify the content of the discussion. Several estimated topic frequencies are then included in a VAR model to estimate the effects of topic shocks on asset prices. We find that the discussion about Fed policy on social media contains price-relevant information. Shocks to shares of “tantrum”-, “QE”- and “data”-related topics are shown to lead to significant asset price changes. We also show that the effects are mostly due to changes in the term premium of yields consistent with the portfolio balance channel of unconventional monetary policy.

Suggested Citation

  • Jochen Lüdering & Peter Tillmann, 2016. "Monetary Policy on Twitter and its Effect on Asset Prices: Evidence from Computational Text Analysis," MAGKS Papers on Economics 201612, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201612
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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2016/12-2016_luedering.pdf
    File Function: First 201612
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    References listed on IDEAS

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    1. repec:jns:jbstat:v:236:y:2016:i:1:p:483-515:n:6 is not listed on IDEAS
    2. Joshua Aizenman & Mahir Binici & Michael M. Hutchison, 2016. "The Transmission of Federal Reserve Tapering News to Emerging Financial Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 317-356, June.
    3. repec:oup:qjecon:v:133:y:2018:i:2:p:801-870. is not listed on IDEAS
    4. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    5. Hansen, Stephen & McMahon, Michael, 2016. "Shocking language: Understanding the macroeconomic effects of central bank communication," Journal of International Economics, Elsevier, vol. 99(S1), pages 114-133.
    6. Stephen Hansen & Michael McMahon & Andrea Prat, 2018. "Transparency and Deliberation Within the FOMC: A Computational Linguistics Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 133(2), pages 801-870.
    7. David Bholat & Stephen Hans & Pedro Santos & Cheryl Schonhardt-Bailey, 2015. "Text mining for central banks," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 33.
    8. Lüdering Jochen & Winker Peter, 2016. "Forward or Backward Looking? The Economic Discourse and the Observed Reality," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 236(4), pages 483-515, August.
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    Citations

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    Cited by:

    1. Ulrich Fritsche & Johannes Puckelwald, 2018. "Deciphering Professional Forecasters’ Stories - Analyzing a Corpus of Textual Predictions for the German Economy," Macroeconomics and Finance Series 201804, University of Hamburg, Department of Socioeconomics.
    2. HOHBERGER, Stefan; PRIFTIS, Romanos; VOGEL, Lukas, 2017. "The macroeconomic effects of quantitative easing in the Euro area : evidence from an estimated DSGE model," Economics Working Papers ECO2017/04, European University Institute.

    More about this item

    Keywords

    Monetary Policy; Fed; Latent Dirichlet Allocation; Text Analysis; VAR;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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