Inattentive Search for Currency Fundamentals

40 Pages Posted: 18 Aug 2017 Last revised: 7 Aug 2018

See all articles by Agnieszka Markiewicz

Agnieszka Markiewicz

Erasmus University Rotterdam (EUR); Tinbergen Institute

ralph verhoeks

Vrije Universiteit Amsterdam

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: August 03, 2018

Abstract

We show how economic agents' limited attention can account for the time-varying link between exchange rates and economic fundamentals. We demonstrate that the higher is the attention for a certain fundamental, the higher is its predictive power in forecasting future currency movements. We proxy attention for a fundamental by its search intensity on Google. In a sample of fifteen bilateral exchange rates from 1995 to 2016, we find that the fundamentals selected by the Google Trends Index significantly outperform the random walk, both statistically and economically. The size of economic profits are considerable: an equally-weighted portfolio earns 4.9% with a Sharpe ratio of 1.3. The highest performance is delivered by strategies that select the single fundamental that receives the highest attention, confirming the limited attention hypothesis.

Keywords: exchange rate forecasting, forex investment strategies

JEL Classification: F31, F41, E44

Suggested Citation

Markiewicz, Agnieszka and verhoeks, ralph and Verschoor, Willem F. C. and Zwinkels, Remco C.J., Inattentive Search for Currency Fundamentals (August 03, 2018). Available at SSRN: https://ssrn.com/abstract=3020932 or http://dx.doi.org/10.2139/ssrn.3020932

Agnieszka Markiewicz

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Ralph Verhoeks

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Willem F. C. Verschoor (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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