Impact of Facial Expressions on Financial Markets

FRANKFURT (Reuters) – The European Central Bank’s President, Christine Lagarde, can move financial markets with a frown, while her predecessor, Mario Draghi, used a smile to reinforce his message, a new study has found.

Traders closely monitor central bankers’ words for cues on interest rate direction. An academic paper titled “The Emotions of Monetary Policy” highlights that changes in facial expressions or tone can influence market prices.

Researchers from Giessen University in Germany employed advanced technology to recognize and classify facial expressions and vocal emotions of Draghi and Lagarde during press conferences following the ECB’s interest rate decisions.

Professor Peter Tillmann and colleagues applied a machine-learning model on the transcripts to assess if the delivered message was dovish (indicating lower rates), hawkish (indicating higher rates), or neutral. They discovered that Draghi’s messages — whether dovish or hawkish — significantly influenced government bond yields, the euro, and euro zone stocks when accompanied by a smile. “It seems that Draghi ‘kills with kindness’ – his words have the intended effect if spoken with a happy face,” wrote the researchers in their recently published paper.

In contrast, Lagarde could amplify her market impact with an angry expression. The study noted, “For President Lagarde… more anger on her face magnifies the hawkish impact on bond yields.”

The findings also revealed that Lagarde exhibited more emotion than her predecessor, and both were inclined to express anger when inflation deviated from the ECB’s 2% target. The authors aim to raise awareness among policymakers and traders about the importance of non-verbal communication and emotional undertones.

Recent studies echo these conclusions, noting that stock prices rose when the Federal Reserve chair maintained a positive tone, while they fell in response to expressions of anger, disgust, or fear. Historical records indicate that early 20th-century Bank of England governors could discipline bankers with merely a raised eyebrow during private discussions.