News sentiment and overshooting of exchange rates |
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Authors: | Stefan Feuerriegel Georg Wolff Dirk Neumann |
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Affiliation: | Finance Research Group, Chair for Information Systems Research, University of Freiburg, Freiburg, Germany |
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Abstract: | In a globalized world, the volume of international trade is based on both import and export prices, thereby making a country’s economy highly dependent on exchange rates. In order to study exchange rate movements, one frequently exploits the so-called Dornbusch overshooting model. However, the model is controversial from a theoretical point of view: it explains exchange rate movements by a number of fundamental variables but ignores how novel information in the form of news can enter the market. As a remedy, this article adjusts for information dissemination by performing a multivariate analysis to compare the classical overshooting model with an extended variant that includes news sentiment. Our results show that news sentiment has a substantial explanatory power of 11% of the exchange rate forecasting error variance. In addition, we also find statistical evidence that a shock in news sentiment may lead to overshooting. |
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Keywords: | Exchange rate overshooting model news sentiment multivariate analysis |
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