Bank Announcements Research Articles

Central Bank Information Effects and Transatlantic Spillovers

The news about the economy contained in a central bank announcement can affect public expectations. This paper shows, using both event studies and vector autoregressions, that such central bank information effects are an important channel of the transatlantic spillover of monetary policy. They account for a part of the co-movement of German and US government bond yields around Fed policy announcements, for most of this co-movement around ECB policy announcements, and significantly affect a range of financial and macroeconomic quantities on both sides of the Atlantic. These findings shed new light on the nature of central bank information.

COVID-19: Stock Market Reactions to the Shock and the Stimulus

Using the WHO announcement on March 11, 2020 and the Federal Reserve Bank announcement on April 9, 2020 as two events that represent the shock and the stimulus, this study finds that COVID-19 caused a negative shock to the global stock markets, especially in emerging markets and for small firms. We find that the US stock market experienced positive abnormal returns from the Fed stimulus compared to other developed countries and emerging markets. We find that the positive abnormal returns from the stimulus were garnered by the US large firms instead of the small firms.

Central bank announcements: Big news for little people?

Little is known on how and whether central bank announcements affect consumers’ beliefs about policy-relevant economic figures. This paper focuses on consumers’ perceptions and expectations of inflation and interest rates and confidence therein. Based on a sound identification (running surveys shortly before and after communication events), and relying on above 15,000 observations, spanning over 12 FOMC press conferences between December 2015 and June 2018, we document the impact of the central bank communication on the general public. While announcement events have no measurable direct effect on average beliefs, they make people more likely to receive news about the central bank’s policy. In general, informed consumers tend to have lower perceptions and expectations, higher confidence and, at least for perceived inflation, smaller errors.

Comment on “Central Bank announcements: Big news for little people?” by Michael Lamla and Dmitri Vinogradov

Lamla and Vinogradov study the causal effect of central bank announcements on consumers' expectations and perceptions by conducting a new series of surveys. I discuss the key empirical results of the paper, supplement their results with evidence of news coverage patternssurrounding Federal Open Market Committee meetings, and provide suggestions for future research using the authors' novel dataset.

Does the Timing of Central Bank Announcements Matter? Trade-Level Data on Hedge Fund Behavior Before Swiss National Bank Meetings

Just over three years after enacting a Minimum Exchange Rate policy for the Swiss Franc vs. Euro (EUR/CHF), the Swiss National Bank (SNB) removed it in a surprise announcement on January 15, 2015. The announcement shocked the FX market — EUR/CHF dropped 25.5 percent in the minutes that followed the press release. The JPMorgan Chase Institute leveraged a data asset of 395 million de-identified transactions executed by over 44,000 institutional investors to measure hedge fund net flows in EUR/CHF spot and forward transactions during the SNB’s Minimum Exchange Rate policy period. Our analysis uncovers two key findings related to hedge fund trading in EUR/CHF during the Minimum Exchange Rate policy period. First, we observe that after hedge funds executed the long EUR/CHF strategy, they then sold EUR/CHF in the days immediately preceding the next regularly scheduled SNB announcement, reducing their potential losses if the Minimum Exchange Rate policy was removed at that meeting. Second, hedge fund's confidence in the persistence of the SNB's Minimum Exchange Rate policy appears to have peaked in the four weeks before the policy was removed. Taken together, our findings have implications for central banks as they consider how their choices with respect to communicating policy changes might impact financial market stability. When choosing the most appropriate method to communicate policy changes, policymakers can use our results to help weigh market expectations with respect to both the timing of announcements and the policy outcomes in the context of the central bank's desired market impacts.

Information Effects of Euro Area Monetary Policy: New Evidence from High-Frequency Futures Data

Central bank announcements move financial markets. The response of inflation and growth expectations, on the other hand, is often small or even counterintuitive. Based on tick-by-tick futures prices on bonds and stock prices, I confirm these seemingly puzzling results for the euro area and provide evidence that they are due to central bank effects. That is, ECB announcements convey not only about monetary policy, but also about economic fundamentals. I separate these information from pure policy via sign restrictions and find intuitive effects of both shocks on a wide set of financial market prices and survey measures of economic expectations.

Central bank announcements and realized volatility of stock markets in G7 countries

We investigate the impact of monetary policy announcements on stock market volatility in the U.S., Canada, Japan, the U.K., Germany, France and Italy during the 2006–2016 period. More specifically, we study the impact of policy rate and quantitative easing announcements of domestic and foreign central banks on realized volatility before, during, and after the event. We find that on the day of an interest rate announcement of the domestic central bank, volatility increases in a manner that is both statistically and economically significant. We also find a decline in volatility five days after an interest rate announcement across all countries in our sample. We further find that quantitative easing announcements have no impact on stock market volatility not only at but also five days before and five days after the announcement date.

Deconstructing Monetary Policy Surprises— The Role of Information Shocks

Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression. It relies on the information inherent in high-frequency co-movement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy nonneutrality. (JEL D83, E43, E44, E52, E58, G14)

Monetary vs. Non-Monetary Macro News: Announcement Equity Premium in China

This paper examines stock market returns in an environment in which the dates of central bank’s information supply through public announcements are not pre-fixed. We document that positive excess returns accumulate for 3 days before China’s central bank releases data of monetary aggregates, which may be announced either early or late in a month. In particular, large pre-announcement premium is associated with late arrivals of announcements. We then present a model to rationalize these facts by highlighting the channel of investors’ rational attention allocation reacting to unscheduled deliveries of announcements. Investors with limited attention would learn about the to-be-announced data only when it’s late in an announcement cycle, whereby an announcement is still pending but investors know better the announcement would soon arrive. Increasingly focused attention then drives down market uncertainty and boosts equity prices ex-ante. We show that China’s unique setting of “quasi-scheduled” central bank announcements provides the exact data structure for identifying the causal mechanism of the attention allocation channel.

A New Measure of Monetary Policy Shocks

Central bank announcements contain both: - a stance on monetary policy - an assessment of the economic outlook When expecting strong growth, central banks usually raise interest rates to stabilize the economy. But an announcement of interest rates higher than the market anticipated may change market participants’ beliefs, leading them to conclude the economy is stronger than they thought. When policy makers and researchers assess monetary non-neutrality, they must consider the distinction between the effect of the central bank’s monetary policy stance and the effects of a shift in fundamentals. I measure this distinction by constructing a monetary policy shock series and applying it to the Federal Reserve’s monetary policy announcements. In particular, I examine the high-frequency movements of interest rates in a 30-minute window around the time of the Federal Reserve’s announcement. Because the announcement may reshape expectations about future monetary policy, I use changes in contract rates of interest rate futures settled in both the current and subsequent months. I then project these surprises onto the Federal Reserve’s information set, which is measured by its own economic forecasts preceding each announcement. The monetary policy stance shock is the portion of interest rate surprises which cannot be explained by the economic forecasts. I estimate the causal effects of monetary policy on the financial market and the macro economy using the constructed monetary policy stance shock as an instrument variable. My findings are consistent with the traditional channels of monetary policy non-neutrality. A contractionary monetary policy shock will cause: - an upward revision in private forecasts of the unemployment rate - a downward revision in private forecasts of inflation - a decline in stock prices

The effect of monetary policy announcements and government interventions on the US insurance industry during the 2007-2009 crisis

PurposeThe authors aim to analyze the impact of monetary policy interventions during the financial crisis of 2007-2009 on the stock prices of US insurance firms.Design/methodology/approachThe authors use an event study methodology and a database of 89 policy announcements to analyze if monetary policy interventions could restore stability in the insurance sector. In addition, the authors conduct a second-stage analysis to identify the individual firms’ determinants of their stock market response.FindingsThe results indicate that the market reaction depends upon the type of policy intervention as well as the timing of the intervention. A second stage analysis examines firm level determinants of the insurers’ stock price responses and finds various firm specific factors also affect the insurers’ reaction to policy interventions.Originality/valueFirst, to the best of the authors’ knowledge, this paper is the first to examine the impact of non-conventional policy announcements on firms from the insurance sector during the financial crisis. Moreover, the authors add to the literature an analysis on how conventional central bank announcements affect insurance firms.

Inflation Announcements and Social Dynamics

AbstractWe propose a new framework for understanding the effectiveness of central bank announcements when firms have heterogeneous inflation expectations. Expectations are updated through social dynamics and, with heterogeneity, not all firms choose to operate, putting downward pressure on realized inflation. Our model rationalizes why countries stuck at the zero lower bound have had a hard time increasing inflation without being aggressive. The same model also predicts that announcing an abrupt target to disinflate will cause inflation to undershoot the target, whereas announcing gradual targets will not. We present new empirical evidence that corroborates this prediction.

The Behaviour of High-Frequency Traders Under Different Market Stress Scenarios

There is a big controversy about the consequences of High-Frequency Traders (HFTs) activity on market quality. This empirical study uses a unique data set provided by the French regulator Autorite des Marches Financiers and gives some evidence concerning the practices of these members under market stress. On the one hand, we investigate the changes in HFTs behaviour related to the level of market stress at a daily scale. On the other hand, we analyse the intraday reactions of these specific market participants to various announcements. We find that in the absence of significant news, whatever the market conditions, HFTs are the main contributors to liquidity with a participation of 80% in the market depth at the three best limits. They constitute 60% of the traded amounts, with an aggressive/passive ratio equal to 53%. We identify a change of regime in the presence of scheduled news that goes beyond the expected reaction to volatility variations. This is notably characterised by an additional decrease by 15% of HFTs share in market depth. Moreover, we focus on two specific events: the European Central Bank announcements of the 3rd of December 2015 that occurred within a trading day and the Brexit that occurred prior to the market opening. Based on these two particular cases, we get that in extreme situations, when non-HFTs have time to adjust their trading tactics, they act as liquidity providers in place of HFTs.

Bank Confidence Crisis and Information Acquisition by Institutional Depositors

We utilize high-frequency data to study heterogeneity in access to bank-level information by corporate depositors during a banking crisis. We examine a bank panic episode in Russia during Summer-2004 triggered by the Central Bank announcement to liquidate banks for suspicious operations. Our results support the presence of sophisticated market monitoring and discipline. Private information about bank risk is available to depositors with a strong business connection to the bank. Other depositors make withdrawals based on publicly-observable bank characteristics. All corporate depositors are susceptible to rumors floating around the banking community. However, those rumors reflect bank-risk fundamentals. Contagion effects seem to be limited.

Announcements credibility and government securities: evidence from Colombia

ABSTRACTThis article evaluates the effect of central bank announcements on government securities yields in emerging economy. In particular, based on the Colombian experience, we present empirical evidence to address the effect of credibility scenario in which the central bank announcements are made. The findings denote that credibility performance must be taken into account to verify the impact of monetary policy announcements.

Equilibrium Yield Curves and the Interest Rate Lower Bound

We study the term structure of default-free interest rates in a sticky-price model with an occasionally binding effective lower bound (ELB) constraint on interest rates and recursive preferences. The ELB constraint induces state-dependency in the dynamics of term premiums by affecting macroeconomic uncertainty and interest-rate sensitivity to economic activities. In a model calibrated to match key features of the aggregate economy and term structure dynamics in the U.S. above and at the ELB, we find that the ELB constraint typically lowers the absolute size of term premiums at the ELB and increases their volatility around the time of liftoff. The central bank's announcement to keep the policy rate at the ELB for longer than previously expected lowers the expected short rate path, but its effect on term premiums depends on the risk exposure of bonds to the macroeconomy; while the announcement increases term premiums if bonds are a hedge against economic downturns, it decreases them otherwise.

Over-reaction to Policy Signals, and Central Bank Optimal Communication Policy

Abstract This paper reviews the theoretical arguments and counter arguments regarding central bank optimal communication policy in an environment with imperfect common knowledge and strategic complementarity. More specifically, the paper discusses the environment in which full transparency is no longer necessarily the superior strategy. Uncertainty about the underlying economic state in the presence of dispersed information is the basis for the emergence of imperfect common knowledge. These issues are further discussed in an augmented Lucas-island model. Full policy transparency in this setting leads to overreliance to central bank public policy signals, resulting in the expectations coordination away from fundamentals - dubbed as over-reaction to central bank announcements. Optimal communication policy in this context entails strategies to limit over-reaction via partial transparency or partial publicity.

Exchange rates, central bank news and the zero lower bound*

ABSTRACTThe zero lower bound (ZLB) may restrict the responsiveness of exchange rates to news. A proxy for central bank communication is added as a determinant in a model of exchange rate movements. Two reserve currencies, the British pound and euro, and two currencies of small open economies, the Canadian dollar and Swedish krona, are examined. Reserve currencies are more vulnerable to the ZLB constraint, while the currencies of small open economies become more responsive to foreign central bank announcements. Certain unconventional monetary policy announcements were found to significantly impact exchange rates at the ZLB.

Jumps in Euribor and the effect of ECB monetary policy announcements

The main tool that the ECB uses to influence monetary policy is through the short-term refinancing rate, a change in the short-term interest rate can in turn cause the whole yield curve to shift. In addition to central bank announcements, interbank rates such as Euribor are also influenced by, forward guidance from the ECB, various macroeconomic events, liquidity in the money markets and the perceived credit worthiness of financial institutions. Forward rates are usually used by policy makers and market practitioners to examine expectations, but options provide additional information about the uncertainty of these expectations, particularly future jump expectations. This research examines the jump characteristics of the 3-month Euribor futures contract and its corresponding futures option contracts using both a jump diffusion model with a Bernoulli jump distribution and option-implied parameters using a jump diffusion process with Poisson distribute. We find that both the Bernoulli jump analysis of historical data and implied jump diffusion model succinctly capture diffusion volatility, jumps and jump size. Using a regression analysis to examine the effect of ECB refinancing rate monetary policy announcements on the 3-month Euribor and the associated jump parameters, we find a significant relationship between ECB announcements and the probability of a jump in Euribor. Regression coefficients on the implied jump amplitude parameters suggest that the market correctly anticipates the direction of the rate announcement suggesting option-implied jump parameters can predict, to some extent, ECB announcements. However, our results also show that there is significant uncertainty before the announcements, and this implies that monetary policy communication is not having the full desired effect.

EXCHANGE RATE MANIPULATION AND CONSTRUCTIVE AMBIGUITY

I consider dynamic models in which investors are heterogeneously informed about both foreign exchange interventions and exchange rate fundamentals and show that transparency sometimes exacerbates misalignment between the exchange rate and fundamentals. Although transparency reveals information about fundamentals, it also increases the precision of the exchange rate as a signal of those fundamentals that remain unknown (the signal‐precision effect of transparency). If a central bank announcement reveals little information about fundamentals, then this effect dominates and transparency magnifies misalignment. One implication is that ambiguity can increase the effectiveness of intervention to support a declining currency during times of crisis.