An investigation of semantic similarity in PBOC’s communication on RMB volatility

Abstract

This study investigates the effects of semantic similarity in the quarterly reports of the People’s Bank of China (PBOC) on renminbi (RMB) exchange rate volatility. Semantic similarity measures the similarity between two documents, and the more similar the two documents, the higher is the value. Our empirical findings show that semantic similarity effects are time-varying. Although high semantic similarity in PBOC’s communication raised the exchange rate volatility before the 2015 exchange rate reform, it reduced the volatility after that the reform. We also find that the semantic similarities between different topics in PBOC’s communication exert different impacts on RMB volatility. Domestic economy has larger impacts before the 2015 exchange rate reform, though domestic money and financial markets starts to play a significant important role since the 2015 reform. We contribute to the literature by showing the effects of PBOC’s communication are time-varying and depend on the content of communication.