Monetary Policy, Intermediaries, and Asset Prices

• Applicant: Professor Dr. Maik Schmeling
• Subject Area: Accounting and Finance
• Term: since 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 447617473

The project seeks to deepen our understanding of how monetary policy news is transmitted to financial markets, with a particular focus on the role of financial intermediaries and the impact of information frictions. Building on findings from the first funding period, the research proposes two core objectives: 1. Understanding Market Participants’ Beliefs The first objective investigates how monetary policy announcements influence market participants’ beliefs about economic fundamentals and asset risk premia. Traditional analyses often link asset price movements to direct interest rate changes, but empirical evidence shows that price reactions are frequently too large to be fully explained this way. The proposal aims to explore whether these reactions reflect shifts in expectations and perceived risk, especially regarding U.S. monetary policy, which has outsized global influence. The project plans to construct a large, international dataset based on survey expectations (e.g., from Consensus Economics) and measure subjective beliefs across countries and institutions, focusing particularly on currency markets and exchange rate fundamentals. 2. The Role of Media as Information Intermediaries The second objective centers on how media reporting and sentiment influence the transmission of monetary policy. Recognizing that media outlets such as Reuters and Bloomberg serve as key intermediaries between central banks and professional market participants, the project will examine whether media tone and framing affect how policy news is received and interpreted. This involves developing a comprehensive database of media content and using text analysis tools to measure sentiment and framing differences compared to official central bank communications. The analysis will also explore how media coverage varies across outlets and over time, and whether it contributes to asset price movements or information diffusion delays. To address these objectives, the work programme includes four main work packages: • WP4: Measure subjective beliefs of market participants using survey data. • WP5: Analyze how monetary policy news affects those beliefs and risk premia globally, especially through the lens of U.S. monetary policy. • WP6: Construct sentiment measures from media reporting using textual analysis on a large news archive. • WP7: Empirically test the impact of media sentiment on expectations and asset prices, using methods to account for potential endogeneity in media coverage. Our project emphasizes the use of high-frequency asset price data to identify monetary policy shocks, building on established databases and methodologies. The insights gained from this research are intended to enhance our understanding of the global transmission of monetary policy and the interaction between financial and information intermediaries in asset markets.

• DFG Programme: Research Units
• Subproject of: FOR 5230: Financial Markets and Frictions - An Intermediary Asset Pricing Approach
• International Connection: Austria
• Partner Organisation: Fonds zur Förderung der wissenschaftlichen Forschung (FWF)
• Cooperation Partner: Professor Dr. Christian Wagner