Do central bank sentiment shocks affect liquidity within the European Monetary Union? A computational linguistics approach

Mullings, R ORCID: https://orcid.org/0000-0002-5569-9117, 2022. Do central bank sentiment shocks affect liquidity within the European Monetary Union? A computational linguistics approach. The European Journal of Finance. ISSN 1351-847X

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Abstract

A common feature of recent financial crises has been the “drying up” of financial market liquidity. Increased attention, therefore, has been directed to central bank policy tools which can affect liquidity, even as policy rates approach the zero lower bound. This study examines the role of the European Central Bank (ECB) Governing Council’s communication in influencing financial market liquidity. A specialized lexicon is used to extract sentiments on i) monetary policy and ii) economic outlook from ECB Governing Council statements between 2006-2016. The analysis reveals that ECB sentiments on “economic outlook” are more consequential for money market (MM) liquidity than for currency, equity and bond (CEB) liquidity. Sentiments on “monetary policy” produce a statistically significant effect on CEB liquidity; with more “hawkish” sentiments leading to declines in liquidity. Volatility in global financial markets, however, plays a relatively more robust role than ECB sentiments in influencing market liquidity. The results are corroborated using an alternative and more generic quantifier called the Loughran and McDonald (LM) sentiment quantifier. The specialized lexicon provides richer inferences than the LM quantifier, however, since it captures the “hawkishness” or “dovishness” of monetary policy tone and the “positivity” or “negativity” of Governing Council sentiments on economic outlook.

Item Type:	Journal article
Publication Title:	The European Journal of Finance
Creators:	Mullings, R.
Publisher:	Informa UK Limited
Date:	21 September 2022
ISSN:	1351-847X
Identifiers:	Number Type 10.1080/1351847x.2022.2124530 DOI 1601549 Other
Rights:	This is an Accepted Manuscript of an article published by Taylor & Francis in European Journal of Finance on 21 September 2022, available at: http://www.tandfonline.com/10.1080/1351847X.2022.2124530
Divisions:	Schools > Nottingham Business School
Record created by:	Laura Ward
Date Added:	21 Oct 2022 08:47
Last Modified:	21 Mar 2024 03:00
URI:	https://irep.ntu.ac.uk/id/eprint/47288

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