WORKS IN PROGRESS:
"FOMC Minutes Sentiment Surprises and their Impact on Financial Markets"
I develop a semi-automated method that systematically evaluates the information in FOMC meeting documents. This method highlights the economic conditions as discussed in policy documents to create sentiment indices that proxy for the FOMC's interest rate tilt. I compare the sentiment index of the discussions in the minutes to the sentiment index of the information in their corresponding FOMC statements. Considering these two types of sentiment indices, I calculate the surprise component of the minutes' sentiments. Using high-frequency data, I then examine how these surprises, which I refer to as news shocks, impact financial markets. In particular, I evaluate the impact of news shocks on fed funds futures, broad equity and real estate investment trust indices, and exchange rate valuation of several major currencies against the U.S. Dollar. My findings indicate that financial assets respond significantly to the surprise sentiments of the minutes, especially after the FOMC implemented its calendar-based forward guidance.
Link to the paper
"Sentiment Comparisons on Monetary Policy Releases from Inflation-targeting Regimes" (Work with Mario Gonzalez)
Around the world, many countries have adopted inflation targeting as their monetary policy framework. Considering this policy framework, institutions set their target interest rates in monetary policy meetings. The policy decisions are then circulated through press releases that explain those decisions. The information contained in these press releases includes current policies, economic outlook, and signals about likely future policies. Given the amount of information in these policy documents, our current paper examines and compares the monetary press releases of a group of inflation-targeting countries. We analyze and compare their grammatical structure using simple measures. We then utilize these measures to analyze the difficulty of understanding the press releases. Finally, we study the underlying information contained in these documents. We use key term frequency and Latent Dirichlet Allocation (LDA), an automated linguistic method in evaluating the qualitative information. Using Content Analysis, we calculate the Sentiment Score index for each set of press releases we analyze. We then examine how the sentiment index of a central bank compares to those of others. We also evaluate how well these sentiment indices predict monetary policy movements. Our findings indicate that the length of the press releases are converging over time but that higher levels of education are needed to understand these documents. Moreover, our results show that the policy sentiments had high co-movement around the Global Financial Crisis period. Lastly, we find that most of the inflation-targeting countries we examined reveal enough information in their press releases to help the public anticipate future movements in the monetary policy rates.
"Signaling and Financial Market Impact of Chile’s Central Bank Communication: A Content Analysis Approach" (Work with Mario Gonzalez)
The Central Bank of Chile determines Chile's monetary policy rate and circulates press releases that explain policy decisions after each of its policy meetings. The information contained in these press releases includes current policies, economic outlook, and signals about likely future policies. In this paper, we examine this type of policy communication by studying the information contained in the releases using Semi-automated Content Analysis. We create a quantitative measure that we call the Sentiment Score index based on this information; we then use this index to evaluate the effectiveness of CBC's communication strategy. In this examination, we analyze if the CBC's communication conveys information regarding the future path of the policy rate. Afterward, we study the impact of the monetary policy statement on financial markets. We find that the CBC's communication provides information that helps anticipate the future stance of monetary policy and that causes significant. short-term impacts on equity markets.
"Forward – Looking Monetary Policy and the Contributions of Public Expectations"
Journal of Accounting and Finance (2020)
Board of Governors staff present macroeconomic forecasts to FOMC members shortly before scheduled policy meetings, but only releases these forecasts to the public after five years. To examine if policy rate decisions depend solely on these forecasts, I analyze whether or not information similar to publicly available economic outlook affect policy decisions. Moreover, I use Semi-Automated Content Analysis on FOMC meeting statements to evaluate the type of forecasts reflected in these statements. I find that publicly available inflation projections and contemporaneous staff forecasts of unemployment best portray macroeconomic information that affects policy while FOMC statements are consistent with staff projections.