Title: Central bank density forecasts and asset prices: Do revisions to higher-order moments matter?
Authors: Ryan Rholes - Texas A and M University (United States)
Tatevik Sekhposyan - Texas A and M University (United States) [presenting]
Abstract: The Bank of England's density forecasts and its revisions are considered to quantify the effects of information flow on the financial markets. This fits into the broader literature on the effects of macroeconomic news on financial markets. It is, however, more particularly interesting from a monetary policy perspective. Forward guidance, i.e. communication about the state of the economy and likely future course of monetary policy, has become an increasingly important part of the central banks' toolkit around the world. These communications are often in the form of published forecasts. Point forecasts and their revisions have been shown to move the financial markets. The effects of the higher moments, however, have not been investigated thoroughly, and this is primarily due to data limitations. Bank of England, on the other hand, has been publishing information on its density forecasts since the late 1990s, making it useful for our analysis. Using daily information on the financial markets, we find that the updates of higher moments are more important in moving the financial markets than the revisions to the first central moment of the density forecasts, making them relevant for the effectiveness of the monetary policy.