The informational content of central bank communication for the energy market: the role of news versus surprises

Abstract

ABSTRACT The reaction of asset prices to monetary and macroeconomic news announcements represents a rich source of information which is important to better understand the financial market impact of economic fundamentals. Given the significant connection of energy to other sectors in the economy, this study attempts to address to what extent the views that a central bank expresses in its communications get reflected in the energy stock market. The GARCH with Jump intensity approach is used to analyse the volatility of energy stock prices and to measure their reactions to anticipated and unanticipated policy news. Moreover, we assess whether central bank communications exert differential impacts on changes in energy stock prices under various time-horizons. Focusing on the European Union and the UK energy stocks, the paper finds evidence of a time-varying market responsiveness. For instance, a more hawkish stance is associated with an increase in the energy stock price jumps for the EU in the short- and medium-terms, whereas it only holds for the UK in the short-run. Although central bank policies do not target the exchange rate itself, we find that the exchange rate channel is an important part of the monetary policy transmission mechanism for the energy market.