Central banks regularly communicate about financial stability issues, by publishing Financial Stability Reports (FSRs) and through speeches and interviews. The paper asks how such communications affect financial markets. Building a unique dataset, it provides an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock marketreturns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and do not generate a volatility reduction during tranquil times, but have had a substantial effect during the 2007-10 financial crisis.
The findings suggest thatfinancial stability communication by central banks are perceived by markets to contain relevant information, and they underline the importance of differentiating between communication tools, theircontent and the environment in which they are employed.
The global financial crisis has triggered heated discussions on how best to achieve financialstability in the future. An important role in that regard has been assigned to central banks, many of which have explicit financial stability mandates. In the light of this, a large number of central banks have communicated extensively on financial stability-related matters, e.g. through the publication of Financial Stability Reports (FSRs) and financial stability-related speeches and interviews.
The aim of the current paper is to shed light on the potential effects of central bank communication about financial stability. It takes a financial market perspective and studies how financial sector stock indices react to the release of such communication, given that the financial sector is one of its main addressees. Doing so, it covers a large number of countries over nearly one and a half decades, and studies the effects of FSRs as well as of speeches and interviews by central bank governors.
