Federal Reserve Communications and Emerging Equity Markets

Abstract

Work on the impact of U.S. monetary policy on emerging financial markets mostly focuses on official target rate announcements; empirical evidence using data on informal communication channels, such as speeches, is scant. Employing a unique data set covering formal and informal communication channels in a generalized autoregressive conditional heteroskedasticity model framework, we provide comprehensive evidence on the effects of U.S. monetary policy on 17 emerging equity market returns over the period 1998–2009. We find, first, that both monetary policy actions and communications have a significant impact on market returns. Second, target rate change surprises are an important driver of emerging market returns. However, informal communications—particularly when taking into account their higher frequency—have a larger (cumulative) influence on returns than do target rate surprises. Third, during the recent financial crisis, central bank communication played an even more pronounced role. Finally, American emerging markets react more to communications than do non‐American markets.