Beyond Fundamentals: Investor Sentiment and Exchange Rate Forecasting

Sebastian Heiden · Christian Klein · Bernhard Zwergel

48 citations0/0 files storedEuropean Financial Management

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Stock Market Forecasting Methods

Abstract

Abstract This paper examines the relation between investor sentiment and exchange rate movements. We use a unique dataset of private and institutional investors’ sentiment and discover that institutional sentiment significantly predicts returns over medium‐term horizons in the EUR/USD market. While institutional investors seem to correctly identify the medium‐run direction of this market, private investors’ sentiment emerges as a contrarian indicator at first sight, however, its predictive power fluctuates heavily and is sample dependent. Our results point towards local investors having an informational advantage in exchange rate forecasting. We test for economic relevance with a simple but realistic out‐of‐sample trading strategy which yields significant results.

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References

1970EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK*1970Efficient Capital Markets: A Review of Theory and Empirical Work 2006Investor Sentiment and the Cross‐Section of Stock Returns 2020Integración de los mercados financieros Latinoamericanos por medio de MILA 1999Predictive regressions 2006Retail Investor Sentiment and Return Comovements 2003The Economics of Exchange Rates 2005Investor Sentiment and Asset Valuation

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2025Investor sentiment and its implication on global financial markets: a systematic review of literature 2011Financial Professionals' Overconfidence: Is It Experience, Function, or Attitude?2021INVESTOR SENTIMENT CONNECTEDNESS: EVIDENCE FROM LINEAR AND NONLINEAR CAUSALITY APPROACHES 2020Investor sentiment and dollar-pound exchange rate returns: Evidence from over a century of data using a cross-quantilogram approach 2020Can Stock Investor Sentiment Be Contagious in China?

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