Central bank communication, information shock and treasury market volatility

Considering China interest rates liberalization reform, the treasury market is an important part of the monetary policy transmission mechanism, in which the treasury yield and fluctuations will be affected by central bank communication information shocks. Compared with formal written communication, oral communication takes place more frequently and more timely, therefore, this paper uses China's central bank oral communication practices from 2003 to 2018 to construct quantitative indicators from multiple dimensions including tone and text complexity for each communication, as well as the textual similarity between current and last communication. Based on the EGARCH model, we comprehensively examine the impact of central bank communication on the yield of the treasury market. We find that communication has an impact on the treasury yield since 2008 financial crisis, and it is more significant for long-term treasury, indicating the information channel of central bank communication is improved gradually. Besides, significant shift in tones, stable and intelligible phraseology can effectively reduce market fluctuation, indicating the coordination channel of central bank communication performs well. That is, China's central bank can effectively maintain financial market stability by expectation management. © 2022, Editorial Board of Journal of Systems Engineering Society of China. All right reserved.