News Sentiment and Overshooting of Exchange Rates

33 Pages Posted: 7 Aug 2018

See all articles by Stefan Feuerriegel

Stefan Feuerriegel

ETH Zürich

Georg Wolff

University of Freiburg - Information Systems Research

Dirk Neumann

University of Freiburg

Date Written: 2016

Abstract

In a globalised world, the volume of international trade is based on both import and export prices, thereby making a country's economy highly dependent on exchange rates. In order to study exchange rate movements, one frequently exploits the so-called Dornbusch overshooting model. However, the model is controversial from a theoretical point of view: it explains exchange rate movements by a number of fundamental variables but ignores how novel information in the form of news can enter the market. As a remedy, this paper adjusts for information dissemination by performing a multivariate analysis to compare the classical overshooting model with an extended variant that includes news sentiment. Our results show that news sentiment has a substantial explanatory power of 11% of the exchange rate forecasting error variance. In addition, we also find statistical evidence that a shock in news sentiment may lead to overshooting.

Keywords: exchange rate, overshooting model, news sentiment, multivariate analysis

JEL Classification: C32, C51, F31, G14

Suggested Citation

Feuerriegel, Stefan and Wolff, Georg and Neumann, Dirk, News Sentiment and Overshooting of Exchange Rates (2016). Feuerriegel, Stefan, Georg Wolff, and Dirk Neumann. "News Sentiment and Overshooting of Exchange Rates." Applied Economics 48.44 (2016): 4238-4250., Available at SSRN: https://ssrn.com/abstract=3215755

Stefan Feuerriegel (Contact Author)

ETH Zürich ( email )

Weinbergstr. 56/58
Zürich, 8092
Switzerland

HOME PAGE: http://www.mis.ethz.ch/

Georg Wolff

University of Freiburg - Information Systems Research ( email )

Kollegiengebäude II
Platz der Alten Synagoge
Freiburg, 79098
Germany

Dirk Neumann

University of Freiburg ( email )

Albert-Ludwigs-Universität Freiburg, Wirtscha.inf.
Kollegiengebäude II, Platz der Alten Synagoge
Freiburg im Breisgau, 79098
Germany

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