Complexity of ECB Communication and Financial Market Trading

Abstract

We examine how the verbal complexity of ECB communications affects financial market trading based on high-frequency data from European stock index futures trading. Studying the 34 events between May 2009 and June 2017, during which the ECB Governing Council press conferences covered unconventional monetary policy measures, and using the Flesch-Kincaid Grade Level to measure the verbal complexity of introductory statements to the press conferences, we find that more complex communications are associated with a lower level of contemporaneous trading. Increasing complexity of introductory statements leads to a temporal shift of trading activity towards the subsequent Q&A session, which suggests that Q&A sessions facilitate market participants' information processing.

Can central bank communication help to stabilise inflation expectations?

“…31 For example, the code words, which were used in the Introductory Statement and in speeches in the first years of the ECB's existence, did not create full certainty to markets about forthcoming interest rates, but left ample scope for macroeconomic uncertainty to influence policy decisions (Heinemann and Ullrich, 2007). A recent study by Hayo, Henseler and Rapp (2019) shows that the Q&A sessions at the ECB press conference have generally facilitated market participants' understanding of the policy messages contained in the President's Introductory Statement. Ehrmann, Gaballo, Hoffmann and Strasser (2019) find that forward guidance may lower the informativeness of market signals.…”

Can Central Bank Communication Help to Stabilise Inflation Expectations?

“…In 33 For example the code words, which were used in the Introductory Statement and in speeches in the first years of the ECB's existence, did not create full certainty to markets about forthcoming interest rates, but left ample scope for macroeconomic uncertainty to influence policy decisions (Heinemann and Ullrich, 2007). A recent study by Hayo, Henseler and Rapp (2019) shows that the Q&A sessions at the ECB press conference have generally facilitated market participants' understanding of the policy messages contained in the President's Introductory Statement. Ehrmann, Gaballo, Hoffmann and Strasser (2019) find that forward guidance may lower the informativeness of market signals.…”

Talking in a Language That Everyone Can Understand? Clarity of Speeches by the ECB Executive Board

“…They show that longer and more complex statements produce a larger monetary policy shock, which helps move markets. Hayo et al (2020) find that the readability of ECB press conferences has a negative effect on financial market trading only when unconventional monetary policy measures are announced.…”