The financial market impact of ECB monetary policy press conferences - A text based approach

Using natural language processing techniques I create two measures of the monetary policy tilt of the ECB, that outline the beliefs of the ECB on the current state of the economy and the outlook for growth and inflation. These measures closely track interest rate expectations over the tightening and loosening cycle, and can provide a useful measure of monetary policy tilt at the zero lower bound and contains information about the state of the economy. I exploit the time lag between the announcement of the monetary policy decision, and the ECB's monetary policy press conference to assess the immediate financial market impact of changes in communication within the press conference, free from the effects of the shock from the monetary policy decision. Consistent with the literature on the information channel of monetary policy, I find a non -negligible positive (negative) effect on stock prices of a more hawkish (dovish) tone in the press conference. This indicates that the ECB reveals "private information"during these press conferences, and that market participants internalise this as good (bad) news regarding the future state of the economy, rather than internalising a future potential increase (decrease) in interest rates. This effect is stronger prior to the introduction of formal forward guidance in July 2013, suggesting that since then ECB communication has been less surprising to markets in recent times.