A Research On Pre-response Of Financial Markets To Monetary Policy Announcements

Since the global financial crisis in 2008,central bank communication has become an important tool for non-traditional monetary policy tools such as "forward guidance" and an important tool for the central bank to implement the expectations management policies.The role of central bank communication includes,but is not limited to,transmitting monetary policy signals,explaining the implemented monetary policy tools,and so on.Through effective guidance of market expectations,policy operations can achieve multiplier effects with half the effort.The Fifth Plenary Session of the 19 th Central Committee of CPC proposed to "build a modern central bank system",emphasizing that the monetary policy regulatory framework needs to be further improved,and put forward higher requirements for the central bank’s expectations management policy.An important direction to improve the effect of the expectations management policy is to strengthen the central bank’s close attention to market dynamics before the implementation of monetary policy,and to actively communicate in advance.The research topic of this thesis is the pre-communication market reaction problem related to central bank communication,specifically discussing the pre-response phenomenon of financial markets such as currency market,Treasury bond market and stock market to important monetary policy announcements.On the basis of sorting out the relevant researches on the communication development of the central bank,the expectations management of the central bank,and the response of the financial market to the macro and micro announcements,this thesis conducts an empirical study on the pre-response phenomenon of the monetary market,the Treasury bond market and the stock market,which are three important financial markets to china’s central bank’s important communication tool-the publication of the "Monetary Policy Implementation Report".In addition to the introduction and conclusion,this thesis consists of five chapters.Chapter One is the literature review and research hypothesis.It mainly sorts out and analyzes the literature of three aspects: central bank communication,central bank expectations management,and financial markets response to macro and micro announcements,and then puts forward research hypotheses.Chapter Two is the construction of monetary policy stance index and monetary policy continuity index.By identifying the release date and content of the "Monetary Policy Implementation Report",combined with narrative measurement methods and wording extraction methods,a text tone index is constructed from the perspective of central bank communication to reflect changes in monetary policy stances.At the same time,a text similarity index is constructed to reflect changes in monetary policy continuity.Chapters Three to Five respectively carry out empirical analysis on the preresponse phenomenon of currency market,the Treasury bond market and stock market to the "Monetary Policy Implementation Report".On the basis of identifying the release date of the "Monetary Policy Implementation Report",the dummy variables of the window period before the announcement are set up,and then event analysis and regression models are used to exploring the reaction of the term premium of SHIBOR interest rate in the money market,the term premium of yield in the Treasury bond market,and the risk premium of stock index in the stock market in the window period before the announcement of the "Monetary Policy Implementation Report".The main research conclusions of this thesis are as follows:(1)There is a pre-response phenomenon in china’s financial market to important monetary policy announcements.Whether it is the currency market,the Treasury bond market or the stock market,they react in advance to the Monetary Policy Implementation Report.Specifically,the term premium of the SHIBOR interest rate in the currency market increased significantly before the announcement,the term premium of the Treasury bond yield in the Treasury bond market increased significantly before the announcement,and the stock index risk premium in the stock market increased significantly before the announcement.(2)In the same financial market,different indicators show different pre-response phenomena.Specifically,in currency markets,the pre-response phenomenon is more pronounced in longer-term SHIBOR rates.In the Treasury bond market,the pre-response phenomenon is more pronounced in short-and medium-term Treasury bond yields,but not in medium-and longterm Treasury bond yields.In the stock market,the pre-response phenomenon is more pronounced in the small and medium-sized stock market indexes with smaller market value,while it is not significant in the Shanghai Stock Exchange 50 stock indexes with larger market value.(3)The pre-response phenomenon exhibits heterogeneity characteristics under different monetary policy stances.Specifically,when the policy stance shown in the "Monetary Policy Implementation Report" is easing/tightening,the pre-response phenomenon of the currency market shows a lower/higher SHIBOR interest rate term premium,the pre-response phenomenon of the Treasury bond market shows a lower/Higher Treasury yield term premiums,and the pre-response phenomenon of stock markets exhibit higher/lower equity index risk premiums.(4)The pre-response phenomenon also exhibits heterogeneity characteristics under different monetary policy continuity.Specifically,when the policy continuity shown by the "Monetary Policy Implementation Report" increases/decreases,the pre-response phenomenon of the Treasury bond market shows lower/higher yield term premiums,and is more sensitive to changes in the content of monetary policy operations,financial market operations and monetary policy trends.When the policy continuity increases/decreases,the stock market pre-response phenomenon shows lower/higher stock index risk premiums,and is more sensitive to changes in the content of macroeconomic analysis and monetary policy trends.Under a series of robustness tests,such as reconsidering the selection of the sample interval,replacing the dependent variables,and excluding the interference of important macroeconomic data releases,the main regression results remain basically unchanged.In view of the above results,this thesis makes some suggestions on policy:(1)Actively and prudently promoting the expectations management policy to ensure the consistency and continuity of the central bank communication.(2)Improving the monetary policy communication institution,including clarifying the release date of the policy announcement and incorporating the financial market response before the announcement into daily monitoring.(3)Improving communication efficiency,including clarifying the expression of policy signals and adopting differentiated communication strategies for different financial markets,etc.The innovation of this thesis is mainly reflected in:(1)Fully excavated the text information of the "Monetary Policy Implementation Report",and expanded the application of text analysis method in central bank communication.As an important form of monetary communication,the "Monetary Policy Implementation Report" is rich in content,covering detailed reports and analysis of the current monetary and credit profiles,monetary policy operations,financial market operations,macroeconomic analysis and monetary policy trends.This thesis first uses the word extraction method to analyze the tone of the report,which is used to measure the monetary policy stance conveyed by the report.At the same time,this thesis uses the cosine similarity algorithm to analyze the text similarity of the report,which is used to measure the continuity of monetary policy conveyed by the report.Further,in the text similarity measurement,the text similarity of different contents in the Monetary Policy Implementation Report is also considered.(2)It enriches the conclusions of the research on the pre-response phenomenon of monetary policy announcements in the financial market.Most of the existing literature focuses on the analysis of the pre-response phenomenon in the stock market,and it is found that the stock index return and risk premium rise abnormally before the announcement.This thesis further expands the research object from the stock market to the currency market and the Treasury bond market,and finds that the SHIBOR interest rate term premium in the currency market and the yield term premium in the Treasury bond market also increase significantly before the announcement.In addition,making full use of the feature that the release time of the "Monetary Policy Implementation Report" is not fully determined,the window period not only selected the one day before the announcement,but also selected the time period within 2-5 days before the announcement.The results showed that the pre-response phenomenon of china’s financial market to the "Monetary Policy Implementation Report" continued for a period of time before the announcement.The above findings complement existing research findings.(3)Combining the text information of the "Monetary Policy Implementation Report" with the pre-response phenomenon,this thesis investigating the heterogeneity characteristics of the pre-response phenomenon under different text information.According to the quantification of the tone of the text information,this thesis distinguishes the loose policy stance and the tightening policy stance conveyed by the "Monetary Policy Implementation Report";according to a similarity measure of textual information,this thesis distinguishes an increase in the delivered policy continuity and a decrease in the policy continuity.Then,this thesis investigates the differences of the financial market pre-response phenomenon under different policy information.