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Impact of Central Bank Decisions and Communications on Sentiment, Uncertainty, Risk Aversion and Investment Behaviour

SHAIKH, RAJA,SHAHZAD (2021) Impact of Central Bank Decisions and Communications on Sentiment, Uncertainty, Risk Aversion and Investment Behaviour. Doctoral thesis, Durham University.



Central bank’s policy decisions and communication influence financial markets through managing investor expectations related to the current and future economic scenario and achieve desired macroeconomic goals. This thesis empirically evaluates the role of signals given in the central bank’s actions and communication in driving investor sentiment, formulating the expected risk premium and shifting the investment behaviour in financial markets. This thesis comprises of three empirical chapters focusing on the response of market participants to the central bank quantitative and qualitative announcements.
Chapter 2 investigates the impact of the United States (US) and domestic monetary policy announcements on consumer and managers’ confidence in the United Kingdom (UK) and 10 countries within the euro area during conventional and unconventional policy times. More specifically, using the confidence indicators of the European Commission, the study examines the response of consumers and managers to monetary policy surprises around the global financial crisis. The findings confirm that during the conventional policy period, the domestic expansionary shock has a significant positive impact on the consumer and manager confidence in the UK and across the ten countries in the euro area. Furthermore, the US conventional monetary policy has more impact on managers’ sentiment compared to domestic policy. However, after the introduction of unconventional policy programme, the monetary announcements turn to be less effective in boosting the confidence of households and businesses.
Chapter 3 analyses the influence of the Federal Reserve’s (Fed’s) communications on investors’ risk perception and appetite in the global equity markets. The results suggest that the Fed’s optimism (pessimism) decreases (increases) the market-wide uncertainty and investors’ risk aversion not only in the US but also in the UK and the euro area. In addition, investors respond to the signals inbound in the communications more significantly during recessionary and uncertain times. Moreover, after estimating unique topics and their relative tone from the Fed’s commutations, this chapter finds that investors pay attention particularly to the discussion related to the financial market, credit conditions, employment, and economic growth in forming their response. Finally, investors react heterogeneously to the discussion about prospering economic outlook and future contractionary policy.
Chapter 4 investigates the effect of the Fed’s communications on the returns and traders’ positions in the commodity markets. Using computational linguistic analysis, this study extracts the policymakers’ indication of the future path of the policy rate. This study documents that the degree of hawkishness in the Fed’s communications decreases the one month ahead returns on metal, energy and overall commodity indexes. In addition, the Fed’s hawkish tone increases (decreases) the commodity traders’ speculating (hedging) positions. This implies that the central bank tone contains information about the economic conditions and provides signals about the future path of the policy which drive the traders’ positions and affect the commodity returns. Furthermore, a topic modelling analysis of the central bank communications reveals that a hawkish discussion about consumption, financial market, and inflation plays a particularly important role in influencing the commodity returns and traders’ positions.

Item Type:Thesis (Doctoral)
Award:Doctor of Philosophy
Keywords:Monetary Policy, Confidence Indicators, Uncertainty, Risk Aversion, Spillover Effect, Textual Analysis, Topic Modelling, Federal Reserve’s Communications, Commodity Returns, Positions of Traders.
Faculty and Department:Faculty of Social Sciences and Health > Economics, Finance and Business, School of
Thesis Date:2021
Copyright:Copyright of this thesis is held by the author
Deposited On:01 Sep 2021 08:57

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