How Closely do Financial Markets Really Listen to Central Bank Tone? A High-frequency Study on ECB Press Conferences

Georg William Wecken & Toni Valentin B├╝chsenmann

Student thesis: Master thesis

Abstract

This thesis examines the effects of central bank tone on financial markets by conducting a textual analysis on 184 European Central Bank press conferences between April 2001 and December 2017. For this purpose, intraday data on euro area equity and bond markets is utilized. Overall, consistent with previous research, results confirm the positive (negative) relationship between ECB tone and equity (bond) returns. However, by further disentangling different financial market shocks, evidence shows that the effect on equity returns is weakened, canceled-out, or, in some cases, even reversed when central bankers use forward guidance. With regards to bonds, on the other hand, the relationship is amplified under the use of forward guidance. By studying different intraday event windows, it is suggested that bond markets systematically react faster and more clearly to central bank tone than equities. Finally, for both bonds and equities, neither volatility nor trading volume is systematically affected by changes in central bank tone.

EducationsMSc in Economics and Business Administration, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2019
Number of pages117
SupervisorsKasper Meisner Nielsen