Assessment of the effect of regulator’s communication on the financial market participants

Abstract

There is significant discussion in the academia and industry regarding over-regulation and under-regulation of the financial markets. Some discussion has been devoted to the transparency requirements for market players imposed by the regulator and their impact on the financial market. However, in the view of the authors, there is a lack of discussion on the effects of regulator communication on financial market participants. Thus, the aim of this paper is to contribute to this discussion. Authors review methods used in assessing central banks’ communication effects on the f inancial markets and based on them develop the approach for regulator’s (in this case central bank) communication effect assessment on the financial market participants. The model is validated on the euro area central bank and two major economies. The results show that a lot of adverse market participants’ reactions on the signals from the central bank’s speeches have been observed.