Central Bank Uncertainty and Long-Run Financial Volatility: Evidence from FOMC Communication and a GARCH-MIDAS Framework

Abstract

This paper examines whether Federal Open Market Committee (FOMC) statement language is associated with the long-run component of equity market volatility. We construct a dataset of 89 scheduled post-meeting statements issued between January 2015 and June 2026 and score each statement along three textual dimensions: Loughran-McDonald (LM) net sentiment, a phrase-based hawkish-dovish (HD) index, and an uncertainty ratio based on hedging language. GARCH-MIDAS estimates link each dimension to the long-run variance component of daily S&P 500 returns. In the full sample, the Uncertainty Ratio is positively associated with long-run variance (theta = 0.197, SE = 0.061, p = 0.001), implying that a one-standard-deviation increase in linguistic uncertainty is associated with a 21.7% increase in the long-run variance component. The HD loading is insignificant, and the LM loading becomes insignificant when jointly modeled with uncertainty; the uncertainty loading remains significant in that joint specification (p = 0.013). To our knowledge, this is the first study to use textual measures extracted from FOMC post-meeting statements as meeting-frequency drivers of the long-run equity-variance component in a GARCH-MIDAS model. The estimand concerns the level of uncertainty language in the ratified statement; sequence, deletion, and market-based uncertainty measures define extensions rather than substitutes for this core design.

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