Does Central Bank Tone Move Asset Prices?

We explore whether the tone of central bank communication matters for asset prices. Using press conference statements by the ECB, which was the first central bank to establish live press conferences after meetings of its Governing Council, we find that tone changes have a statistically and economically significant effect on equity returns. Stock prices increase when ECB tone becomes more positive and vice versa. The return differential associated with positive versus negative tone changes is around 60 basis points on press conference days and increases to more than 100 basis points until the next press conference. Moreover, we find that positive tone changes are associated with increasing government bond yields, lower implied equity volatility, lower variance risk premia, and lower corporate credit spreads. Since we also show that tone changes are unrelated to current and future economic fundamentals, these results support the conjecture that central bank tone matters for asset prices through a risk-based channel. Our main findings also apply to U.S. markets, where stock prices and Treasury yields increase when the Fed chair’s tone in the Congressional Testimony becomes more positive.