Beyond Fundamentals: Investor Sentiment and Exchange Rate Forecasting

21 Pages Posted: 5 Jun 2013

See all articles by Sebastian Heiden

Sebastian Heiden

University of Augsburg

Christian Klein

University of Kassel

Bernhard Zwergel

University of Augsburg

Date Written: June 2013

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.

Keywords: investor sentiment, exchange rates, institutional investors, private investors, long‐horizon regressions, bootstrapping

Suggested Citation

Heiden, Sebastian and Klein, Christian and Zwergel, Bernhard, Beyond Fundamentals: Investor Sentiment and Exchange Rate Forecasting (June 2013). European Financial Management, Vol. 19, Issue 3, pp. 558-578, 2013, Available at SSRN: https://ssrn.com/abstract=2274518 or http://dx.doi.org/10.1111/j.1468-036X.2010.00593.x

Sebastian Heiden (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Christian Klein

University of Kassel ( email )

Nora Platiel Str.4
Kassel, Hessen 34109
Germany

Bernhard Zwergel

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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