RBA monetary policy communication: The response of Australian interest rate futures to changes in RBA monetary policy

This paper examines the Australian interest rate futures market reaction to changes in Reserve Bank of Australia (RBA) monetary policy. Having determined market expectations from 30-day Interbank futures, the study finds evidence that interest rate futures react strongly to target rate announcements across the maturity spectrum, with a stronger reaction evident in short maturity futures. Further, there is evidence of an asymmetric news effect whereby volatility reacts more strongly to bad news. Disaggregation of the market reaction into target- and path-surprise factors demonstrates that the change in market expectations of future target rates plays a significant role in explaining changes in yield, particularly for bond futures. There is strong evidence that monetary policy statements drive the path-factor, while the December 2007 modification in policy communication has improved the ability of the RBA to influence market expectations.     

The channels of monetary policy triggered by central bank actions and statements in the Australian equity market

Owing to the discrete disclosure practices of the Reserve Bank of Australia, this paper provides new evidence on the channels of monetary policy triggered by central bank actions (monetary policy announcements) and statements (explanatory minutes releases), in the Australian equity market. Both monetary policy announcements and explanatory minutes releases are shown to have a significant and comparable impact on the returns and volatility of the Australian equity market. Further, distinct from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channels and no evidence of the exchange rate channel following central bank actions, this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy, with only weak evidence of the balance sheet channel of monetary policy. These channels are found to be operating irrespective of the trigger (monetary policy announcements or explanatory minutes releases), though results are somewhat weaker when examining the explanatory minutes releases. These results have important implications for central bank officials and financial market participants alike: by confirming a comparable avenue to affect monetary policy; and providing an explication of its impact on the Australian equity market.     

Monetary policy signaling and movements in the term structure of interest rates

This paper examines how various monetary policy signals such as repo rate changes, inflation reports, speeches, and minutes from monetary policy meetings affect the term structure of interest rates. We find that unexpected movements in the short end of the yield curve are mainly driven by unexpected changes in the repo rate. However, published inflation reports and speeches also have some impact on short rates. Speeches are found to be a more important determinant for the longer end of the term structure. Our conclusion is that central bank communication is an essential part of the conduct of monetary policy.     

The impact of monetary policy on M&A outcomes

Monetary policy influences a wide range of Mergers and Acquisitions (M&A) outcomes. First, an increase in the federal funds rate predicts a negative market reaction to M&A announcements, an increase in the likelihood of deal withdrawal, and significant financing challenges for the acquirer in the post-acquisition phase. Second, M&As announced during periods of high monetary policy uncertainty are associated with significant declines in acquirer value. This negative market reaction reflects a unique discount to compensate for the high riskiness of M&As in an uncertain monetary environment. Finally, we show that monetary contraction, rather than monetary policy uncertainty, is a key contributor to the decline in the aggregare M&A activity.     

Cross-border spillover effects of unconventional monetary policies on Swiss asset prices

Unconventional monetary policies (UMPs) announced by the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan exert important spillover effects on asset prices in Switzerland. Using a broad UMP event set and a long-term bond-futures based measure of market anticipation, we show that surprisingly expansionary UMPs lower Swiss government and corporate bond yields, induce the Swiss franc to appreciate, and dampen Swiss equity prices. Four extensions provide further insights. First, the estimated effects are strongest for announcements by the ECB. Second, the impact on government bonds is largest for bonds with residual maturities of 7–10 years. Third, the impact of foreign UMP shocks on exchange rates and Swiss bond yields is less pronounced after the introduction of the minimum rate of 1.20 Swiss franc per Euro by the Swiss National Bank on September 6, 2011, indicating that domestic monetary policy action partially affects the impact of external monetary shocks on domestic financial markets. Fourth, the sign of spillover effects differs for positive and negative UMP surprises, but their strength does not.     

International interest rates and US monetary policy announcements: Evidence from Hong Kong and Singapore

This paper investigates the responses of market interest rates to US monetary policy announcements for the US and two emerging economies, Hong Kong and Singapore which are similar on many respects but have experienced opposite exchange rate regimes in the last twenty years. Our results, based on market expectations extracted from federal fund futures rates, document that FOMC announcements significantly affect the term structure of interest rate in the US and both Asian countries. Further, international interest rate differentials around FOMC meeting dates tend to be negative for short maturities with the impact gradually dissipating as bond maturity increases. Finally, for the case of Singapore, we find that domestic interest rates react to both external and domestic monetary policy announcements with a magnitude that is larger over the full bond maturity spectrum for domestic announcements. These results are robust to time-varying futures risk premia and alternative measures of interest rates expectations.     

Intraday volatility responses to monetary policy events

This paper explores the effects of US monetary policy events on intraday volatility in the US equity markets. We examine Federal Open Market Committee (FOMC) announcements as well as real-time changes in market expectations about future policy announcements and their impact on the intraday volatility dynamics of the S&P 500 index. The analysis shows elevated intraday volatility following FOMC announcements through the market close, with a spike at the time of the announcement. We then differentiate the volatility spike by modeling an asymmetric response based on the direction of the actual target rate change. Our results suggest that the size of the volatility spike is dependent on the direction of the rate change, with expansionary monetary policy actions having a larger spike than contractionary policy actions. The duration of these volatility spikes is relatively short-lived, with the spike dampening out within 15 minutes. A more lasting impact is, however, documented for real-time changes in market expectations where the volatility spike tends to persist for at least one hour.     

Simultaneous monetary policy announcements and international stock markets response: An intraday analysis

This paper investigates the return and volatility response of major European and US equity indices to monetary policy surprises by utilizing extensive intraday data on 5-min price quotes along with a comprehensive dataset on monetary policy decisions and macroeconomic news announcements. The results indicate that the monetary policy decisions generally exert immediate and significant influence on stock index returns and volatilities in both European and the US markets. The findings also show that press conferences held by the European Central Bank (ECB) that follow monetary policy decisions on the same day have a clear impact on European index return volatilities. This implies that they convey additional important information to market participants. Overall, our analysis suggests that the use of high frequency data is critical to separate the effect of monetary policy actions from those of macroeconomic news announcements on stock index returns and volatilities.     

The impact of monetary policy on the exchange rate: evidence from three small open economies

This paper studies the impact effect of monetary policy shocks on the exchange rate in Australia, Canada, and New Zealand during the 1990s. Shocks are identified by the reaction of three month market interest rates to policy announcements that were not themselves endogenous to economic news on the same day. The main result is that a 100 basis point contractionary shock will appreciate the exchange rate by 2-3 percent on impact. The association of interest rate hikes with depreciations that is sometimes observed during periods of exchange market pressure is mainly attributable to reverse causality.     

Liquidity and Information Flow around Monetary Policy Announcement

We analyze the effects of monetary policy announcements on stock market liquidity using intraday data. We show that the impairment in liquidity associated with policy announcements occurs primarily after, rather than before, the announcements, and is relatively short lived, lasting about 1.5 hours. Liquidity impairment varies proportionately with the information content of the policy announcement, with larger effects associated with unscheduled announcements and scheduled announcements with larger policy surprises. Overall, our results suggest that informed traders have an information processing advantage over uninformed participants rather than access to private information.     

Unconventional monetary policy announcements and risk aversion: evidence from the U.S. and European equity markets

ABSTRACT

This paper examines the role of unconventional monetary policy announcements on risk aversion – as proxied by the variance premium – by using panel data analysis. The objective of this empirical analysis is to investigate the risk-taking channel of monetary policy for the major European and U.S. equity markets by studying the impact that the announcements of an unconventional monetary policy has on market uncertainty and risk perception. By measuring the difference between risk-neutral and realised and conditional variance, we estimate the variance premium, which captures the impact that pricing concerns have on the prices of options. The empirical analysis indicates that easing monetary policies can significantly reduce the variance premium. In addition, we examine the risk premium structure across markets to determine the potential differences in investors’ risk aversion.     

Stock market reaction to policy interventions

ABSTRACT

We analyse stock price reactions to the announcements of monetary and fiscal policy actions in 12 stock exchanges worldwide between 1 June 2007 and 30 June 2012. While past papers have analysed the effect of policy interventions focusing on monetary policy actions (e.g. Ricci 2015), our paper focuses on stock indices either capturing the whole stock market or various industries. By estimating abnormal stock reactions around the announcement date, we show that (1) stock industry indices react to policy interventions in a different manner than the broad stock index does; (2) stock returns react negatively to restriction measures for general and non-banking sector indices; and (3) stock reaction to expansionary measures was stronger at the beginning of the financial crisis.     

Monetary policy transmission in vector autoregressions: A new approach using central bank communication

In this paper, we study the role played by central bank communication in monetary policy transmission. We employ the Swiss Economic Institute’s Monetary Policy Communicator to measure the future stance of the European Central Bank’s monetary policy. Our results indicate, first, that communication has an influence on inflation (expectations) similar to that of actual target rate changes. Communication also plays a noticeable role in the transmission of monetary policy to output. Consequently, future work on monetary policy transmission should incorporate both a short-term interest rate and a communication indicator. A second finding is that the monetary policy transmission mechanism changed during the financial crisis as the overall effect of monetary policy on (expected) inflation and output is weaker and of shorter duration during this period compared to the overall sample period.     

The impact of economic news on bond prices: Evidence from the MTS platform

Although there is an extensive literature on the impact of macroeconomic announcements on asset prices, the bond market has received less attention than the foreign exchange and equity markets, even less if we consider the European market. This paper uses high-frequency intra-day data over a three-year period to investigate the impact of regularly scheduled macroeconomic news and monetary policy announcements on the returns of the Italian government bond market, the largest one in the Euro-zone. With respect to the previous papers, we use a much broader set of announcements, 68, and a relatively novel dataset (MTS). We find that 25 news have a significant impact on bond returns and that almost all announcements are incorporated into prices within 20 min from the release.     

货币政策公告、政策不确定性及股票市场的预公告溢价效应——来自中国市场的证据

中国人民银行周期性发布的货币政策相关公告为市场判断货币政策走向提供重要信息。较于实体经济反馈政策信息具有滞后性,股票市场是否在货币政策公告期内及时对政策消息做出反应,即存在公告效应？股票价格是否体现预期货币政策调整带来的不确定性？本文基于2011-2017年A股市场数据,研究我国股票市场在我国货币政策相关公告发布前后几日这一较短窗口区间内的市场反应。结果表明,股市指数在发布货币供应量指标的公告前几天内会出现显著为正的风险溢价,而在指标发布后溢价并不显著,这一现象我们称之为货币政策相关公告的“预公告溢价效应”。本文发现,预公告溢价的产生并非由于市场提前预期到货币政策的走向,而是来源于投资者预先获得了对政策不确定性的溢价补偿。本文进一步就防范系统性风险、从数量型货币政策工具向价格型转变等问题提出了相关政策建议。     

央行货币政策报告文本信息、宏观经济与股票市场

本文利用金融情感词典和文本分析技术,分析中国人民银行货币政策执行报告的文本情绪、文本相似度和文本可读性等多维文本信息,刻画央行货币政策执行报告的文本特征,探究货币政策报告的文本信息与宏观经济和股票市场的关系。实证研究发现,货币政策报告的文本情绪的改善会引起显著为正的股票市场价格反应,报告文本相似度的增加会引起股票市场波动性的显著降低,报告可读性对公布后股票市场的波动性影响不显著。货币政策报告文本情绪还与诸多宏观经济指标显著相关。进一步研究发现,引起股票市场显著反应的是报告文本情绪中反映货币政策指引的部分,而反映宏观经济历史状态的部分对股票市场的影响不显著。本文从文本大数据分析角度证明了我国央行沟通的有效性,对国内央行沟通相关研究形成了有益补充。     

Monetary policy effects in times of negative interest rates: What do bank stock prices tell us?

This paper investigates bank stock performance following different monetary policy actions in times of positive and negative interest rates. Controlling for the broader stock market, monetary policy announcements that cause an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve are found to persistently reduce bank stock prices once the interest rate environment is negative. Consistent with the deposits channel of monetary policy, the effects are larger and more persistent for banks that are relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in times of negative interest rates. Accounting data confirm that a parallel drop in the yield curve following a monetary policy decision in a negative interest rate environment hurts banks through shrinking deposit margins.     

Unconventional Monetary Policy in the Eurozone: A Lack of Forward Guidance?

From July to December 2011, the three-month EURIBOR-OIS and EURIBOR-Repo spreads quadrupled and reached 100 basis points due to a stabilization of the EURIBOR and a decrease in the overnight index swap (OIS) and Repo. Using a specific monetary policy announcements and financial indicators database, we find that the European Central Bank’s (ECB’s) unconventional measures did not systematically have a calming effect: Asset buyout announcements decreased market strains, whereas interest rates and liquidity provision announcements did not. Moreover, liquidity provision seems to have a stressing effect. Our findings are consistent with the theoretical underpinnings according to which forward guidance crucially determines the effectiveness of unconventional monetary policies.     

The discrete and differential impact of monetary policy

This study exploits a unique feature of the Australian monetary policy environment to determine whether economic recovery can be stimulated via central bank communications. This study finds that unexpected monetary policy announcements and communications have a significant and comparable impact on the value and volatility of the Australian foreign exchange market, suggesting that they can be used interchangeably to stimulate economic recovery. However, further analysis reveals that the state of the economy influences this impact. Specifically, during poor economic states, monetary policy actions speak louder than words, an adage that in this context provides actionable information for central bank regulators.     

The high-frequency response of exchange rates to monetary policy actions and statements

This paper investigates the impact of US monetary policy on the level and volatility of exchange rates using an event study with intraday data for five currencies (the US dollar exchange rate versus the euro, the Canadian dollar, the British pound, the Swiss franc, and the Japanese yen). I construct two indicators of news about monetary policy stemming separately from policy decisions and from balance of risk statements. Estimation results show that both policy decisions and communication have economically large and highly significant effects on the exchange rates, with the surprise component of statements accounting for most of the explainable variation in exchange rate returns in response to monetary policy. This paper also shows that exchange rates tend to absorb FOMC monetary surprises within 30-40 min from the announcement release.