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“Communicating with Many Tongues: FOMC Speeches and U.S. Financial

Market Reaction”

by Bernd Hayo, Ali M. Kutan, and Matthias Neuenkirch

Discussion byDennis W. Jansen

Texas A&M University

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Recap

• Examines Speeches, Post-Meeting Statements, Monetary Policy Reports, Testimonies.

• Is there an impact on interest rates, stock returns, and/or exchange rates?– By types of communications (speeches, etc.)– By entity doing the communicating

• Look at impact by BOG vs regional banks• Or by chair of BOG, governors, regional bank

presidents, etc.

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Recap of Results

• Impact on returns and volatility larger if communication channel is ‘more formal.’

• Communications by BOG generally larger impact than regional bank presidents

• Communications by chairman of BOG generally larger than other BOG members.

• Some unexpected signs, lack of statistical significance, indicate speeches may not by themselves be that important for financial markets.

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Recap of Results

• To me, most intriguing results concern news agencies. Authors report evidence that news agencies perform a role in filtering the information in speeches. – Evidence is circumstantial, but related to prior

work by Ehrmann and Fratzscher (2007), who use newswire information on Fed communications

– Remember, Hayo and coauthors directly look at the speeches, testimonies, etc.

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Methodology

• Speeches (1439), congressional hearings (151), post-meeting statements (68), and monetary policy reports (20) were examined.

• Economic outlook can be ‘positive’ ‘neutral’ or ‘negative.’

• Monetary policy can be ‘tightening’ ‘neutral’ or ‘easing’.

• Difficulty: determining the surprise or news in a speech. – Can’t easily determine pre-speech expectations

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Methodology

• Daily financial data Jan 1 1998 – Dec 29 2006– Stock returns– Foreign exchange returns– Daily changes in rates on 3-mo, 6-mo, 1-yr, and 2-yr treasuries.

• Controls– Foreign financial counterparts of the above, USD/Yen rate,

concensus forecasts of GDP, CPI, current GDP, CPI, GDP and CPI 1 year ahead (why?)

– Surprise components: advance GDP, trade balance, I.P., ISM manufacturing index and Conf Board consumer confidence index, housing starts, nonfarm payroll, UE, retail sales, CPI, PPI, all entered as impulse variables on the day of their announcement.

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Specification

• Returns = f(change in FFTR, consensus forecasts, macro announcements, 9-11 dummy, communications dummies) + h

• GARCH(1,1) – h = h(macro announcements, communication events)

• There is a more inclusive model presented in the paper, but it is not used because of estimation difficulties.

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Results – Some Anomalies

• Statement MP tightening at t-1 results in interest rate declines (2 or 3 b.p.) at t. (Why?)

• Meanwhile, Statement MP tightening at t results in a 3 b.p. increase in 2-yr rate at t.– Why the discrepancy?

• Also: Speech MP easing at t+1 results in interest rate declines (1-3 b.p.) at t for all but 2-yr rate.

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Robustness Checks

• Authors compare their results with Ehrmann & Fratzscher– Differences due to differences in definitions, codings– E&F use news agency events, not speeches

themselves.– More news about Greenspan in the media than what

is in delivered official speeches.• News agencies include information interviews, extra

information• News agencies many not precisely identify who is speaking

on behalf of the FED in these informal matters. More may be attributed wholly or partially to Greenspan than is warranted.

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Intriguing Result

• Dating Greenspan speeches with the date they appear in the media – not the date the speech was given -- corrects the anomalous findings.

• Interp: Financial markets rely on media reports delivered via news agencies. News agencies act as filter. Financial markets react with a lag to speeches even when those speeches are delivered during market trading hours. News agency reports tend to occur after hours or on the next day.

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More…

• News agencies do not cover all speeches

• They report on after-speech Q&A

• Apparently the news agencies play an important information-transmission role in the marketplace!

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General Editorial Comments

• Discussion of estimation results is at times a bit confusing. Authors present a model that is not actually used for the relevant results.

• The authors mention a novelty index, and a repetition index. It is not clear to me how these were constructed.

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Suggestion re E&F

• Used E&F window, coding, etc., to basically reproduce their results

• Might explore robustness of E&F results– Asymmetric response to tightening/easing– Asymmetric response to EO positive/negative– Can you explore a longer window in the E&F

framework?

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Suggestion re News Agency Results

• News agencies provide and filter Fed communications.

• Is filtering less important when speeches or testimony are covered by CNN or C-Span? – Idea is such events are viewed in real time by traders.– Put an indicator variable for when TV coverage was

available?• Might allow estimation of impact of ‘filtering’ by

news agencies• Of course, CNN (and C-SPAN?) coverage is not

random, involves selection issues by both CNN and by the Fed itself.

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Additional Comments

• Do all speeches that mention E.O. or M.P. convey information over and above what is available in measured financial variables?– Related to issue of the surprise component of the speech.– Communication about Fed actions or potential actions are most

clearly areas in which the Fed has superior information.• How much do we care about the impact of a ‘typical

speech’ mentioning MP easing, or MP tightening? • Perhaps we should look at specific speeches at specific

times.• Tie results to theory?

– State of world at time of event should matter– Exact nature of the communication should matter.

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Additional Comments

• The fact that news agencies tend to filter speeches also suggests that individuals might likewise filter the information in speeches.

• News agency filtering of speeches is evidence that not all speeches are alike.

• Maybe we should turn the problem around. We can look at dates of individual communication events (speech, or news article about speech) and use the market response to indicate there was (or may have been) important information in the speech.

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May 24 2001 Event: Speech by A.G.EO: negative; MP: easing

Interest Rate Changes May 24 2001

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

TB3M TB6M TN1Y TN2Y

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May 24 2001 Event: CAR’s

CAR May 24 2001

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

TB3M TB6M TN1Y TN2Y

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April 21 2004 Event: Testimony by A.G.EO: positive; MP: tightening.

Interest Rates Event=Apr 21 2004

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

TB3M TB6M TN1Y TN2Y FFR

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April 21 2004 Event: CAR’s

CAR April 21 2004

-0.1

-0.05

0

0.05

0.1

0.15

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11

TB3M TB6M TN1Y TN2Y