Investor Attention to News on Financial Integration and Currency Returns

Abstract

In this paper, we examine the economic value of a text-based measure of financial integration. Our attention measure of financial integration is a strong positive predictor of currency excess returns. Specifically, the financial integration measure is positively priced in the cross-section of currency excess returns. Thus, investors require a risk premium for holding currencies with high exposure to financial integration news. Our results are robust to alternative test assets, and the financial integration portfolios offer significant alphas when controlling for other currency investment strategies.

Keywords: financial integration, capital flows, news, textual analysis, foreign exchange market, currency returns, risk premium.

JEL Classification: F31, G11, G12, G14, G32.