Real-time Price Discovery via Verbal Communication: Method and Application to Fedspeak

We advance the hypothesis and establish empirically that investors’ expectations adjust slowly to Central Banks’ messages. From the videos of post-FOMC-meeting press conferences, we extract the words, and timestamp them at the millisecond. We align the transcripts with high-frequency data for several financial assets to provide granular evidence on the investors’ expectations formation process. When the Chairman discusses the changes between current and previous policy statement, price volatility and trading volume spike dramatically, and prices move in the same direction as they did around the statement release. Our approach allows us to quantify in monetary terms the value of information rigidity.