۱- Introduction

۲- Conceptual framework

۳- Data

۴- Asset price sensitivity to central bank communication: An overview

۵- Stock-yield comovement and the nature of central bank news

۶- Stock-yield comovement and unconventional monetary policy

۷- Decomposing asset price responses to central bank communication

۸- Conclusion

References

Abstract

Using evidence from four major central banks, we decompose news conveyed by central-bank communication into news about monetary policy (monetary news), as well as non-monetary news, i.e., news about economic growth and news affecting financial risk premia. Our approach exploits high-frequency comovement of stocks and interest rates combined with monotonicity restrictions across maturities in the yield curve. We find significant differences in the news composition depending on the communication channel used by central banks. Monetary news prevails in policy decision announcements. However, the non-monetary component accounts for more than half of communications that provide context to policy decisions such as press conferences and minutes. We show that non-monetary news drives a significant part of financial markets’ reaction during the financial crisis and in the early recovery, while monetary news gains importance since 2013.

Introduction

The relevance of central bank communication has risen significantly over the past decade as policy goals and associated operations have becomemore complex. Constrained by the effective lower bound on policy rates, major central banks have resorted to unconventional measures. Communicating these policies poses a challenge, as evidenced by the rise in the verbosity of central bank statements. New empirical methods are needed to quantify the effects of monetary policy, especially when monetary shocks measured using interest rate changes around announcements can be conflated with other information about the economic and financial conditions. This paper proposes a new approach to analyzing the information content of central bank communication. Drawing on the joint dynamics of government bond yields with equity returns around central bank releases, we quantify the importance of different economic shocks that drive the response of financial markets to policy communication. Specifically, we classify the information revealed by central banks into monetary policy, economic growth, and risk premium news. By the latter, we mean news that affects investors’ risk valuations (via changes in risk appetite or sentiment) separately from changes in economic fundamentals. Collectively, we refer to news about economic growth and news affecting risk premia as non-monetary news. Our approach to dissecting the news content of central bank communication exploits both the direction of the comovement between stocks and yields as well as the effect of news across the maturity dimension of the yield curve. We build our intuition using a stylized macro-finance model that delivers the following predictions. A conventional monetary policy shock affects the real rate and induces a negative comovement of stocks and yields that is stronger at short maturities. Both growth and risk premium shocks induce a positive comovement of stocks and yields.