Discussion of

A quantitative Assessment of the Qualitative Aspects of Chairman Greenspan’s Communications

Alberto Montagnoli(University of Stirling)

April 2009

The main questions and answers of the paper

Two questions

• Did financial markets react to Greenspan’s communications?

• Can CB’s communications help to explain the mean and volatility of asset prices?

Answer

• Yes, Greenspan’s communications were informative and macroeconomic language moved financial markets

Bligh & Hess Strategy

Look at the statements, speeches, testimony to capture

• Level of certainty

• Degree of pessimism

• Macroeconomics

The analysis moves away from subjectivism (i.e. possible misclassifications)

, , , , , ,

Statesmants, Speech, Testimony

u Tt j j jr f c FF FF NEWS CERT PESS MACRO

j

Some comments (I)

• In Equation (1)

• Volatility. Use a GARCH (1,1) model where the conditional variance is function of the communications variables

0 1 2

0 1 2

0 1 2

...

but following Kuttner (2001) and Bernanke and Kuttner (2005)

which gives

...

Following the event-study approach:

u Tt t t

T u et t t

u u et t t t

ut t

r FF FF

FF FF FF

r FF FF FF

r FF F

...etF

Some comments (II)

• CERTAINTY, PESSIMISM and MACRO

1. What is pessimism? Is it uncertainty? Maybe confusion in terminology

2. The three sets appear broadly definedThere could be model/data/global CERT(PESS)

3. The MACRO variable seems highly correlated to CERT (PESS)

• From Appendix B . “Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins.” (01/31/01)

This is classified as an example of Jargon (MACRO), but it could be classified as PESSIMISM.

4. CERTAINTY and PESSIMISM are rather rich indicators, but they need a little further semantic controls. I think that the analysis could pay greater attention to the role of rhetoric in the Greenspan’s communications in the context of CERTAINTY and PESSIMISM.

Some comments (III)

• MACRO is significant in Table 3A only once and never in Table 3B, significance increases in the estimates of volatility (Table 4A and 4B).• In Table 4A, in five out of seven cases the sign is positive,

this allows us to say that Central Bank communication creates news, but we cannot say if this communication is good or bad.

• If volatility is bad, is more information any good ?

• Chairman Greenspan’s communications have been able to create news, but there is still the question whether these have been able to reduce noise (i.e. provide a meaningful signal to the market) or just created extra volatility.

Which leaves the question: is communication good?