Financial market reactions to central bank communication

This dissertation explores how central bank communication influences financial markets, focusing on the transmission of information through policy statements, program announcements, and forward guidance. By combining event-study methodologies, yield curve modeling, and volatility analysis, the research investigates how financial market participants interpret and react to central bank messages in both the United States and the Euro area. The analysis covers bond yields, stock market volatility, and broader implications for monetary transmission under different policy environments. The first empirical study examines yield reactions to forward guidance in the United States. Using high-frequency data surrounding Federal Reserve announcements, it quantifies the immediate impact of forward-looking policy statements on Treasury yields across maturities. Employing an event-study framework and regression-based sensitivity analysis, the study finds that forward guidance substantially alters market expectations of the future policy rate path. Short- and medium-term maturities exhibit the strongest yield responses, indicating that communication about the timing and persistence of policy normalization is a critical driver of bond market pricing. The findings confirm that the tone, clarity, and credibility of central bank statements shape the effectiveness of forward guidance as a monetary policy tool. The second part extends the analysis to the Euro area, investigating yield reactions to European Central Bank (ECB) program announcements, such as the Securities Markets Programme (SMP), the Outright Monetary Transactions (OMT), and the Asset Purchase Programme (APP). Through a carefully constructed event dataset and multiple regression specifications, the study isolates announcement effects on sovereign yields across member states. Results show significant yield compression following announcements of unconventional policy programs, particularly in stressed sovereign markets. Panel regressions further reveal that countries with higher yield spreads experience stronger reactions, confirming the credibility and signaling effects of ECB interventions. Moreover, robustness checks confirm that program-specific and timing-related factors play a central role in determining the magnitude of market responses. The third empirical study investigates how ECB communication affects the entire yield curve. It develops a model linking communication tone, timing, and policy content to shifts in the level, slope, and curvature of the Euro area yield curve. The analysis demonstrates that clear and consistent communication reduces uncertainty in expectations and flattens the yield curve, signaling confidence in policy continuity. Conversely, ambiguous or surprise statements tend to steepen the curve and increase market volatility. These results emphasize the role of transparency and consistency in anchoring interest rate expectations, particularly in periods of unconventional monetary policy. The fourth study focuses on the effects of ECB announcements on stock market volatility. Utilizing multiple measures—high-frequency realized volatility, daily price ranges, future and implied volatility indices—the research examines how equity markets respond to policy communications over time. The results indicate that monetary policy announcements have statistically significant effects on volatility, especially during crisis and post-crisis periods. Positive announcements (e.g., expansionary or supportive policies) tend to reduce volatility, while negative or tightening-related communications heighten it. The study also explores asymmetric effects, persistence over subsequent days, and the weighting of announcement content, revealing that market sensitivity depends on both the perceived economic outlook and the credibility of policy measures. Across all four studies, the findings collectively underscore that central bank communication is a powerful instrument of monetary policy—capable of moving markets even in the absence of traditional rate changes. The magnitude and direction of financial market reactions depend on message clarity, policy credibility, and prevailing market conditions. The research highlights that well-calibrated communication enhances the predictability of monetary policy, stabilizes expectations, and reduces excess volatility. In contrast, ambiguity or inconsistency can amplify uncertainty and undermine transmission effectiveness. The dissertation contributes to the literature by providing a comprehensive cross-market and cross-institutional analysis of how communication serves as a vital, yet complex, channel of modern monetary policy in both normal and crisis periods.