When Words Move Markets: How the Tone of Fed Communications Shape Stock Market Returns and Volatility

Overview

This research investigates how the tone and topics of Federal Open Market Committee (FOMC) announcements affect stock market returns and volatility across different economic conditions and company sizes. I compiled data from multiple sources, including historical transcripts from the Federal Reserve Board and macroeconomic indicators from the Federal Reserve Economic Data (FRED). Using Natural Language Processing (NLP) models, I quantified the sentiment, topics, and emotions of FOMC announcements. I then applied multivariable linear regression models, with returns on the S&P 500 and Russell 2000 indices, and the CBOE Volatility Index (VIX) as dependent variables, and sentiment, topics, emotions, and economic indicators as independent variables. The results indicate that positive sentiment in FOMC announcements has a statistically significant positive impact on R2000 returns, and this relationship is stronger when GDP is higher. However, there was no significant relationship between sentiment and S&P 500 returns, although more positive sentiment leads to lower market volatility. The topics of the announcements affect S&P 500 returns, and the topics affect S&P 500 and R2000 differently.

Competition history

• CSEF 2026 Behavioral & Social Sciences (Senior Division) · Entry S-03-14

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