Title: Tweeting on monetary policy and market reactions
Authors: Davide Romelli - Trinity College Dublin (Ireland) [presenting]
Donato Masciandaro - Bocconi University (Italy)
Gaia Rubera - Bocconi University (Italy)
Abstract: How does central bank communication affect financial markets? It is shown that monetary policy announcements of three major central banks, i.e. the Federal Reserve, the European Central Bank and the Bank of England, trigger a significant non-expert monetary policy discussion on Twitter. Using machine learning techniques, we classify Tweets related to monetary policy around the announcement date and build a metric of the similarity between the policy announcement and Twitter traffic before and after the announcement. We interpret large changes in the similarity of Tweets as a proxy for monetary policy surprise and show that market volatility spikes after the announcement whenever changes in similarity are high. These findings suggest that social media discussions on central bank communication are aligned with bond and stock market reactions.