Do Sentiment and Exchange Rate Share Memories? An Application of Multifractional Process Modeling

17 Pages Posted: 11 Oct 2017

See all articles by Yanyan Yang

Yanyan Yang

Claremont Graduate University

Qidi Peng

Claremont Graduate University

Date Written: October 10, 2017

Abstract

We use the notion of local Holder regularity to investigate the roughness of the pattern of EUR/USD exchange rate process as well as the corresponding investor sentiment dynamic process. Specifically, we use the pointwise Holder exponent to measure the local Holder regularity of a multifractional process. This application extends the increment ratio method to estimate the pointwise Holder exponent of multifractional Brownian motion function. Our testing and comparison results show that both the exchange rate and the sentiment proxy's local Holder regularities are time-varying and are more homogeneous during crises periods. More importantly, in contrast to the optimistic sentiment, the roughness of the pessimistic sentiment dynamic process displays only slightly higher similarity to that of EUR/USD exchange rate. These results suggest that the EUR/USD exchange rate process and the pessimistic sentiment dynamic process share a common pattern of smoothness, which implies that they share a similar "memory" pattern.

Keywords: Investor Sentiment, EUR/USD exchange rate, Point-wise Holder exponent, Multifractional process, Nonparametric estimation

JEL Classification: C46, G41

Suggested Citation

Yang, Yanyan and Peng, Qidi, Do Sentiment and Exchange Rate Share Memories? An Application of Multifractional Process Modeling (October 10, 2017). Available at SSRN: https://ssrn.com/abstract=3050354 or http://dx.doi.org/10.2139/ssrn.3050354

Yanyan Yang (Contact Author)

Claremont Graduate University ( email )

Claremont, CA 91711
United States
9095242322 (Phone)
9095242322 (Fax)

Qidi Peng

Claremont Graduate University ( email )

150 E. Tenth Street
Claremont, CA 91711
United States

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