Does central bank tone move asset prices?

This paper shows that changes in the tone of central bank communication have a significant effect on asset prices. Tone captures how the central bank frames economic fundamentals and its monetary policy. A positive tone surprise is associated with increases in stock prices and interest rates whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for policy actions as well as for conventional measures of monetary policy shocks. Our results suggest that communication tone is a powerful instrument of monetary policy, which affects risk premia embedded in asset prices.