Ambiguous Monetary Policy Communication and Asset Pricing : Evidence from a Policy-Driven Market

This paper explores the cross-sectional asset pricing implications of the ambiguity of central bank communication through the dispersion of multiple policy stances in a single communication. By distinguishing different sentiments for each communication event with a field-specific lexicon, we obtain the time series of the probabilities that the policy stance of the People’s Bank of China (PBC) is dovish, neutral, or hawkish. Using these probabilities, we develop a measurement for the ambiguity of PBC communication. The main findings indicate that our ambiguity index earns a significant negative risk premium, even after controlling for other textual policy uncertainty indexes. This paper contributes to the literature by investigating the ambiguity of central bank communication with novel empirical evidence that ambiguity is an economically important factor in the cross-section of asset returns