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

ArXiv ID: 2408.03328 “View on arXiv”

Authors: Unknown

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.

Keywords: Sentiment Analysis, Monetary Policy, Central Bank Communications, High-Frequency Analysis, Market Expectations, Equity (Broad Market)

Complexity vs Empirical Score

• Math Complexity: 4.5/10
• Empirical Rigor: 6.0/10
• Quadrant: Street Traders
• Why: The paper applies standard econometric methods like regressions and statistical tests (Ljung-Box, Breusch-Pagan) with clear empirical data handling, but the mathematical depth is moderate, focusing more on implementation and data analysis than advanced theory.

  flowchart TD
    A["Research Goal<br/>Does SBP communication tone impact KSE stock returns?"] --> B["Data Collection<br/>SBP Monetary Policy Documents & KSE Market Data"]
    B --> C["Sentiment Analysis<br/>Quantify Tone using NLP"]
    C --> D["High-Frequency Analysis<br/>Event Study with Short Time Windows"]
    D --> E["Regression & Control Variables<br/>Isolate Impact of Tone"]
    E --> F{"Key Findings"}
    F --> G1["Positive Tone → Positive Returns"]
    F --> G2["Negative Tone → Negative Returns"]
    F --> G3["Significant Impact after controlling for policy tools"]
    F --> G4["Effect is short-term, not long-term"]