The power of words: A content analytical approach examining whether central bank speeches become financial news

Abstract

Few studies have examined the impact that central bank indirect intervention has on exchange rates. Efficient market theory predicts that new information within central bank communication will become a component of information used by currency traders. This study applies a novel methodology to examine whether information contained within Bank of Canada and the Reserve Bank of Australia communications does in fact get embedded within the information reported on the financial newswires. The primary data are speeches that are made public by the two central banks and from news as reported by Reuters from 1995 to 2009. Applying content analysis and an innovative use of information science theoretic measures, we demonstrate the flow-through of information contained within central bank communications to the information set used by traders.