Media Tone Goes Viral: Global Evidence from the Currency Market

90 Pages Posted: 13 Apr 2020

See all articles by Heikki Lehkonen

Heikki Lehkonen

University of Jyväskylä - School of Business and Economics

Kari Heimonen

University of Jyväskylä

Kuntara Pukthuanthong

University of Missouri, Columbia

Date Written: March 24, 2020

Abstract

Using several million news and social media articles related to currencies, we examine the role of media tone in predicting the exchange rate returns of 12 developed and 24 emerging markets from 1998 to 2016. The text-based currency Media tone is a strong positive predictor of currency excess returns beyond fundamentals of one to three months ahead and six months cumulatively, with the average in-sample and out-of-sample R^2s of 4.45% and 9.03% in the US. The one-month predictability is observed in four other developed markets and 18 emerging market currencies, with the latter showing a stronger pattern. This predictability encompasses previous month currency returns, currency factors, macro fundamentals, and market sentiment and is stronger for currencies that are freely floating, less liquid, difficult to value, costly to arbitrage, and which have high interest rates. The effect is channeled through expectation errors and driven by the forecasting component rather than risk. The predictability of Media tone is driven by non-mainstream financial media.

Keywords: Media tone, Text analysis, Exchange rates, Forecasting

JEL Classification: F31, G14, G41

Suggested Citation

Lehkonen, Heikki and Heimonen, Kari and Pukthuanthong, Kuntara, Media Tone Goes Viral: Global Evidence from the Currency Market (March 24, 2020). Available at SSRN: https://ssrn.com/abstract=3560587 or http://dx.doi.org/10.2139/ssrn.3560587

Heikki Lehkonen

University of Jyväskylä - School of Business and Economics ( email )

PO Box 35
University of Jyväskylä
Jyväskylä, FIN-40014
Finland

Kari Heimonen

University of Jyväskylä ( email )

Seminaarinkatu 30
Jyväskylä, 40100
Finland

Kuntara Pukthuanthong (Contact Author)

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

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