Sentiment Analysis of State Bank of Pakistan's Monetary Policy Documents and its Impact on Stock Market

TL;DR

This study investigates how the sentiment in the State Bank of Pakistan's monetary policy documents influences stock market returns, revealing short-term impacts but no long-term effects.

Contribution

It introduces a sentiment analysis approach to quantify central bank communication tone and assesses its immediate impact on stock market performance.

Findings

Positive tone increases stock returns in the short term

Negative tone decreases stock returns in the short term

Communication impact remains significant after controlling for other variables

Abstract

This research examines whether sentiments conveyed in the State Bank of Pakistan's (SBP) communications impact financial market expectations and can act as a monetary policy tool. To achieve our goal, we first use sentiment analysis techniques to quantify the tone of SBP monetary policy documents and second, we use short time window, high frequency methodology to approximate the impact of tone on stock market returns. Our results show that positive (negative) change in the tone positively (negatively) impacts stock returns in Karachi Stock Exchange. Further extension shows that the communication of SBP still has a statistically significant impact on stock returns when controlling for different variables and monetary policy tool. Also, the communication of SBP does not have a long term constant effect on stock market.