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Beyond Fundamentals: Investor Sentiment and Exchange Rate Forecasting
Author(s) -
Heiden Sebastian,
Klein Christian,
Zwergel Bernhard
Publication year - 2013
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2010.00593.x
Subject(s) - contrarian , predictive power , institutional investor , market sentiment , exchange rate , sample (material) , economics , financial economics , point (geometry) , trading strategy , relevance (law) , econometrics , monetary economics , finance , corporate governance , philosophy , chemistry , geometry , mathematics , epistemology , chromatography , political science , law
This paper examines the relation between investor sentiment and exchange rate movements. We use a unique dataset of private and institutional investors’ sentiment and discover that institutional sentiment significantly predicts returns over medium‐term horizons in the EUR/USD market. While institutional investors seem to correctly identify the medium‐run direction of this market, private investors’ sentiment emerges as a contrarian indicator at first sight, however, its predictive power fluctuates heavily and is sample dependent. Our results point towards local investors having an informational advantage in exchange rate forecasting. We test for economic relevance with a simple but realistic out‐of‐sample trading strategy which yields significant results .