Template-type: ReDIF-Paper 1.0
Author-Name: Dr. Romain Baeriswyl
Author-Name-First: Romain
Author-Name-Last: Baeriswyl
Author-Person: pba446
Author-Name: Camille Cornand
Author-Name-First: Camille
Author-Name-Last: Cornand
Author-Person: pco917
Title: Reducing overreaction to central banks' disclosures:theory and experiment
Abstract: Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to a fraction of market participants only (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). We show that, in theory, both communication strategies are strictly equivalent in the sense that overreaction can be indifferently mitigated by reducing the degree of publicity or by reducing the degree of transparency. We run a laboratory experiment to test whether theoretical predictions hold in a game played by human beings. In line with theory, the experiment does not allow the formulation of a clear preference in favor of either communication strategy. This paper then discusses the opportunity for central banks to choose between partial transparency and partial publicity to control market reaction to their disclosures.
Length: 60 pages
Creation-Date: 2012
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2012/working_paper_2012_08
File-Format: text/html
Number: 2012-08
Classification-JEL: C92, D82, D84, E58
Keywords: heterogeneous information, public information, overreaction, transparency, coordination, experiment
Handle: RePEc:snb:snbwpa:2012-08