Understanding the impact of monetary policy announcements: The importance of language and surprises |
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| Institution: | 1. Curtin Graduate School of Business, Curtin University, Australia;2. Department of Banking & Financial Management, University of Piraeus, Greece;1. University of Cologne, Albertus-Magnus-Platz, D-50923 Cologne, Germany;2. University of Tübingen, Mohlstraße 36, D-72074 Tübingen, Germany;1. Champagne School of Management (Group ESC Troyes), Troyes, France;2. Newcastle University Business School, Newcastle University, Newcastle, United Kingdom;3. IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France;4. Durham University Business School, Durham University, Durham, United Kingdom;5. Université Paris-Est, IRG (EA 2354), UPEC, F-94000, Créteil, France;6. International School, Vietnam National University, Hanoi, Vietnam;1. University of Alabama at Birmingham, United States;2. California State University, Fullerton, United States;3. University of Mississippi, United States |
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| Abstract: | Monetary policy announcements have a significant impact on financial market liquidity. This study provides a novel perspective on the factors driving this relationship in the market for 10-year Treasury note futures: Target rate surprises and the complexity of the monetary policy statement language are important determinants. Differences of opinion resulting from interpretation of complex language appear to result in more trading volume despite relatively low levels of liquidity (a negative liquidity-volume relationship), while large target rate surprises reduce trading activity (a positive liquidity-volume relationship). The dynamic changes over time, as unconventional polices are adopted by monetary authorities and, high frequency traders become more pervasive. Central bankers may aid market liquidity by minimizing surprises, and issuing statements that are easier to understand (with shorter sentences and more familiar words). |
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