Textual Information of Central Bank Monetary Policy Reports, Macro Economy and Stock Markets, a paper co-authored by our school’s Professor Jiang Fuwei, and Hu Yichi, an undergraduate of our school’s Outstanding Academic Talent Cultivation Program, among others, was lately accepted by the Journal of Financial Research, pending publication.
In recent years, the People’s Bank of China (PBOC) has attached increasing importance to central bank monetary policy communication. As central bank communication becomes a hot issue in the macro economy and the financial academia, many scholars have carried out a large amount of meaningful research on the measurement of central bank communication, central bank communication & inflation expectations, central bank communication & financial markets, etc. However, existing studies mainly focus on monetary policy tendencies disclosed in central bank communication, but ignore other qualitative information contained therein.
This paper conducts an all-round and multi-dimensional analysis of the texts of monetary policy reports with cutting-edge big data analysis technologies. Studying a total of 71 monetary policy implementation reports (the “Reports”) of the central bank in 1Q2001-3Q2018, the authors work out textual indicators including tone, similarity and readability, and look into the relations between the Reports’ textual information, the macro economy and stock markets. Based on the Chinese Financial Sentiment Dictionary developed by Jiang Fuwei et al. (2000), this paper works out the tone of the Reports using the sentiment unit method. Moreover, it uses TF-IDF weighted cosine similarity and average sentence length to indicate the similarity and readability of the Reports. After calculating and describing the textual characteristic indicators thereof, this paper conducts an empirical analysis of the relations between the textual characteristics of the Reports, the macro economy and stock markets. Through correlation analysis, this paper examines the relations between the textual sentiment of the Reports and macroeconomic and financial indicators such as economic growth, inflation and interest rate movement. The authors also add the three indicators (tone, similarity and readability) to the EGARCH model to investigate whether they would affect the return rate and volatility of stock markets on the trading day immediately after the publication of the Reports. Furthermore, the authors conduct an empirical study over the mechanism of how the tone of central bank communication texts affects stock markets. By dividing the Reports’ contents into two parts (economic and financial fundamentals, and central bank policy guidelines), they figure out the textual tone of the two parts respectively to investigate whether both of the two parts can have notable effect on stock markets.
Empirical results show that the tone of the Reports is apparently correlated with a number of macroeconomic indicators such as economic growth, inflation and employment, and that a higher tone predicts the improvement of the macro economy. After controlling for variables such as economic growth and monetary policy, the tone of the Reports has an evident positive impact on the return rate of market stocks after the publication. The higher similarity of the texts, the less volatility of stock markets; otherwise, greater volatility. Textual readability does not have visible impact on stock market volatility. Further studies find that it is the tone of central bank policy guidelines that has significant impact on stock markets, other than that of macroeconomic and financial fundamentals. This indicates that the reason why the tone of the Reports affects stock markets is, in essence, central bank policy guidelines, other than economic and financial fundamentals.
Against the backdrop of increasing emphasis placed by the Chinese government on preventing and eliminating systemic financial risks, establishing and optimizing monetary policy as well as macro-prudential management policy, the findings of this paper are of important significance to strengthening financial regulation and promoting macro-prudential management. The empirical results stated herein show that PBOC’s communication can notably affect stock markets, fully recognizing the effectiveness of PBOC’s communication. Through adequate communication with the market, the central bank can influence asset prices, and achieve the goal of adjusting the economy and maintaining financial stability. Furthermore, the authors also point out that it is the tone of the central bank’s judgments about future economic situations and policy outlook in the Reports that truly affects markets. Given this conclusion, the central bank shall make good use of its authority and influence, and manage market expectations more effectively by announcing and clearly explaining its judgments about next-stage economic and financial situations and its monetary policy.
