Topic:Thus spoke FOMC:The Fed and Sovereign CDS Spreads*

Lecturer:Jian Li

Jian Li is an associate professor at the Institute of Advanced Economics, Dongbei University of Finance and Economics. He received his Ph. D. from the University of Frankfurt, Germany.His research interests include household finance, capital flows and ageing,financial stability and innovation economics.The findings were published in European Economic Review, Journal of Empirical Finance, Economics Letters, China Economic Review, Technological Forecasting & Social Change.

Abstract：

We study how sovereign credit default swaps (SCDS) respond to central bank communications.Employing a GPT-based NLP communication measure,we find that dramatic changes in the Federal Open Market Committee's (FOMC) hawkish or dovish stance,as conveyed through the FOMC speeches and meeting statements,have provided useful information, influencing the trajectory of SCDS spreads. When the FOMC is already in an extremely hawkish or dovish position, the market overreacts and requires 3-4 days to absorb the information and take appropriate actions. Asymmetries exist upon the direction of central bank communications.The hawkish voices provide signals, meanwhile,the dovish tones indicate noises.We also observe a significant surge of information flowing into the SCDS market one day prior to large shifts of the FOMC'S position.Our findings highlight the significance of the application of large language models and provide implications for improving the effectiveness of central bank guidance.

Time:2:00-3:30p.m,October 18th,2024

Venue:B321,Zhixin Building,Central Campus