Investor Attention and FX Market Volatility

Kita, Arben; Wang, Qingwei

doi:10.2139/ssrn.2022100

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Investor Attention and FX Market Volatility

46 Pages Posted: 15 Mar 2012 Last revised: 7 Jan 2013

See all articles by Arben Kita

Arben Kita

University of Liverpool Management School

Qingwei Wang

Cardiff University - Cardiff Business School

Date Written: March 14, 2012

Abstract

We study whether investors' active information acquisition, measured by search volume in Google (SVI), affects the dynamics of currency prices. Significantly correlated with trading activities of major players, SVI has a strong effect on FX market volatility beyond the volatility of macroeconomic fundamentals: (1) an increase in SVI is associated with higher volatility in both time series and cross section; (2) causal effects run mainly from SVI to volatility. In addition, SVI is related to currency risk premium and carry trade returns. Our results suggest that investor attention is a priced source of risk in FX markets.

Keywords: Investor Attention, FX Volatility, Option Pricing, GARCH

JEL Classification: G12, G14

Suggested Citation: Suggested Citation

Kita, Arben and Wang, Qingwei, Investor Attention and FX Market Volatility (March 14, 2012). Available at SSRN: https://ssrn.com/abstract=2022100 or http://dx.doi.org/10.2139/ssrn.2022100