Federal Reserve Communications and Emerging Equity Markets

Abstract

Work on the impact of U.S. monetary policy on emerging financial markets mostly focuses on official target rate announcements; empirical evidence using data on informal communication channels, such as speeches, is scant. Employing a unique data set covering formal and informal communication channels in a generalized autoregressive conditional heteroskedasticity model framework, we provide comprehensive evidence on the effects of U.S. monetary policy on 17 emerging equity market returns over the period 1998-2009. We find, first, that both monetary policy actions and communications have a significant impact on market returns. Second, target rate change surprises are an important driver of emerging market returns. However, informal communications-particularly when taking into account their higher frequency-have a larger (cumulative) influence on returns than do target rate surprises. Third, during the recent financial crisis, central bank communication played an even more pronounced role. Finally, American emerging markets react more to communications than do non-American markets.

Investor response to public news, sentiment and institutional trading in emerging markets: A review

“…He finds large and significant response of Asian, European and Latin American equity indexes to US monetary policy announcement surprises at short time horizons. Hayo et al (2012) provide evidence about the effects of US monetary policy on 17 emerging equity market returns over the period 1998-2009. They find that central bank communications have a significant impact on market returns and informal communications have a larger influence on returns than do target rate surprises.…”

Shocking Language: Understanding the Macroeconomic Effects of Central Bank Communication

“…For example, Ehrmann and Fratzscher (2007) examine the communication strategies of the ECB, Bank of England and the Federal Reserve; Ranaldo and Rossi (2010) examines the financial market effects of Swiss National Bank announcements; Hayo and Neuenkirch (2010) considers the predictability of future Fed rates using information in announcements; Berger, Ehrmann, and Fratzscher (2011) looks at the ECB and media reaction; and Hayo, Kutan, and Neuenkirch (2012) focuses on asset market reactions to Fed communications.…”

Communication matters: US monetary policy and commodity price volatility

“…In our analysis, we use a new data set introduced and described in detail in Hayo et al (2008Hayo et al ( , 2011. One of the advantages of this data set is that it covers the recent crisis period.…”