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Central Banks signals and their effects in the financial markets – a factor-augmented vector autoregressive model approach
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The development of sentiment analysis enables Central Banks to better understand the impact of their formal and informal interventions in the financial markets and in the economy. This paper uses Structural VAR and Factor-Augmented VAR models, combined with a sentiment analysis developed by Kanjoya(2017), to study the impacts of the signals sent by the ECB. These models enable us to conclude that different signals sent by the Central Bank have contrasting effects in stock prices, FOREX and government debt markets. Positive signals suggest higher stock returns and lower stock volatility, whilst negative signals suggest lower returns and higher volatility.
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Sentiment analysis Web content mining Factor-augmented vector autoregressive model Financial markets