Market Reactions to Central Bank Communication Policies: Reading Interest Rate Options Smiles

Marie Brière ()

No 06-009.RS, Working Papers CEB from Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB)

Abstract: This paper compares the communication strategies of the Fed and the ECB and their impact on financial markets. Interest rates options were used to calculate daily probability distributions of market expectations and to examine how they are modified by central banks’ announcements. We found that Greenspan’s speeches have a stronger influence on rate levels and market uncertainty than Duisenberg’s. Moreover, market expectations most significant reaction is to economic indicators central banks mention as being important. Monetary decisions are regularly anticipated thanks to speeches and economic releases and the dominant speech themes were shown to be “monetary policy” and “domestic economy”.

Keywords: central bank communication; risk neutral density; futures option pricing; event studies. (search for similar items in EconPapers)
JEL-codes: E43 E58 G13 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fin, nep-fmk, nep-mac and nep-mon
Date: 2006-05
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http://www.solvay.edu/EN/Research/Bernheim/documents/wp06009.pdf First version, 2006 (application/pdf)

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Persistent link: http://EconPapers.repec.org/RePEc:sol:wpaper:06-009

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