Market Sentiment and Exchange Rate Directional Forecasting

12 Pages Posted: 28 Jul 2015  

Vasilios Plakandaras

Democritus University of Thrace

Theophilos Papadimitriou

Democritus University of Thrace

Periklis Gogas

Democritus University of Thrace - Department of Economics

Konstantinos Diamantaras

Alexander Technological Educational Institute of Thessaloniki

Date Written: May 1, 2015

Abstract

The microstructural approach to the exchange rate market claims that order flows on a currency can accurately reflect the short-run dynamics of its exchange rate. In this paper, instead of focusing on order flows analysis we employ an alternative microstructural approach: We focus on investors' sentiment on a given exchange rate as a possible predictor of its future evolution. As a proxy of investors' sentiment we use StockTwits posts, a message board dedicated to finance. Within StockTwits investors are asked to explicitly state their market expectations. We collect daily data on the nominal exchange rate of four currencies against the U.S. dollar and the extracted market sentiment for the year 2013. Employing econometric and machine learning methodologies we develop models that forecast in out-of-sample exercise the future direction of the four exchange rates. Our empirical findings reject the Efficient Market Hypothesis even in its weak form for all four exchange rates. Overall, we find evidence that investors' sentiment as expressed in public message boards can be an additional source of information regarding the future directional movement of the exchange rates to the ones proposed by economic theory.

Suggested Citation

Plakandaras, Vasilios and Papadimitriou, Theophilos and Gogas, Periklis and Diamantaras, Konstantinos, Market Sentiment and Exchange Rate Directional Forecasting (May 1, 2015). Algorithmic Finance (2015), 4:1-2, 69-79. Available at SSRN: https://ssrn.com/abstract=2636426

Vasilios Plakandaras

Democritus University of Thrace ( email )

University Campus
Komotini, 69100
Greece

Theophilos Papadimitriou

Democritus University of Thrace ( email )

University Campus
Komotini, 69100
Greece

Periklis Gogas (Contact Author)

Democritus University of Thrace - Department of Economics ( email )

Komotini, 69100
Greece

HOME PAGE: http://www.econ.duth.gr/personel/dep/gkogkas/index.en.shtml

Konstantinos Diamantaras

Alexander Technological Educational Institute of Thessaloniki ( email )

P.O. Box 141
Sindos Thessaloniki, 57 400
Greece

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