Foreign Exchange News and Currency Reversals
64 Pages Posted: 19 Jun 2020
Date Written: May 26, 2020
Analyzing around 1.2 million FX-related news articles, we examine the cross-sectional predictive ability of FX news sentiment building an investment strategy that buys (sells) currencies with low (high) media sentiment. We find that this strategy offers positive and statistically significant returns, indicating a currency reversal that is associated with an overreaction of FX traders. In addition, low sentiment currencies attract more net buy (sell) orders based on number of trades (volume), implying that while smaller investors buy low-sentiment currencies, larger players sell them. Our results are robust to other determinants of currency premia.
Keywords: FX News, Currency Risk Premium, Currency Reversals
JEL Classification: F31, G11, O32, O34
Suggested Citation: Suggested Citation