Central Bank Communication and the Yield Curve

Matteo Leombroni, Andrea Vedolin, Gyuri Venter, Paul Whelan

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We extract novel measures of ECB target rate announcement and communications shocks using high frequency data on money market rates and study their impact on yields of Eurozone countries. We find that (i) target rate shocks have little effect on changes in bond yields of Eurozone countries, while communication shocks have a significant impact, with intermediate maturities being affected the most; (ii) positive (negative) communication shocks significantly lower (raise) the yield spread between the peripheral and core countries; (iii) this cross-sectional difference arises after the 2008 financial crises; (iv) higher credit risk amplifies the effect of communication shocks, and more so for core countries. We rationalize these findings in a parsimonious international term structure model in which interest rates are determined by the interaction between risk-averse arbitrageurs and reaching-for-yield investors.
Original languageEnglish
Publication date2016
Number of pages51
DOIs
Publication statusPublished - 2016
EventChicago International Macro Finance Conference - Gleacher Center, Chicago, United States
Duration: 2 Dec 20163 Dec 2016
http://faculty.chicagobooth.edu/internationalMacro-Finance/program.html

Conference

ConferenceChicago International Macro Finance Conference
LocationGleacher Center
CountryUnited States
CityChicago
Period02/12/201603/12/2016
Internet address

Keywords

  • Interest rates
  • Monetary policy
  • Sovereign bonds
  • Reaching for yield

Cite this

Leombroni, M., Vedolin, A., Venter, G., & Whelan, P. (2016). Central Bank Communication and the Yield Curve. Paper presented at Chicago International Macro Finance Conference, Chicago, United States. https://doi.org/10.2139/ssrn.2873091
Leombroni, Matteo ; Vedolin, Andrea ; Venter, Gyuri ; Whelan, Paul. / Central Bank Communication and the Yield Curve. Paper presented at Chicago International Macro Finance Conference, Chicago, United States.51 p.
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Leombroni, M, Vedolin, A, Venter, G & Whelan, P 2016, 'Central Bank Communication and the Yield Curve' Paper presented at, Chicago, United States, 02/12/2016 - 03/12/2016, . https://doi.org/10.2139/ssrn.2873091

Central Bank Communication and the Yield Curve. / Leombroni, Matteo; Vedolin, Andrea; Venter, Gyuri; Whelan, Paul.

2016. Paper presented at Chicago International Macro Finance Conference, Chicago, United States.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Central Bank Communication and the Yield Curve

AU - Leombroni, Matteo

AU - Vedolin, Andrea

AU - Venter, Gyuri

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AB - We extract novel measures of ECB target rate announcement and communications shocks using high frequency data on money market rates and study their impact on yields of Eurozone countries. We find that (i) target rate shocks have little effect on changes in bond yields of Eurozone countries, while communication shocks have a significant impact, with intermediate maturities being affected the most; (ii) positive (negative) communication shocks significantly lower (raise) the yield spread between the peripheral and core countries; (iii) this cross-sectional difference arises after the 2008 financial crises; (iv) higher credit risk amplifies the effect of communication shocks, and more so for core countries. We rationalize these findings in a parsimonious international term structure model in which interest rates are determined by the interaction between risk-averse arbitrageurs and reaching-for-yield investors.

KW - Interest rates

KW - Monetary policy

KW - Sovereign bonds

KW - Reaching for yield

KW - Interest rates

KW - Monetary policy

KW - Sovereign bonds

KW - Reaching for yield

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Leombroni M, Vedolin A, Venter G, Whelan P. Central Bank Communication and the Yield Curve. 2016. Paper presented at Chicago International Macro Finance Conference, Chicago, United States. https://doi.org/10.2139/ssrn.2873091