Up: 4:1-2

Market sentiment and exchange rate directional forecasting

Vasilios Plakandaras; Theophilos Papadimitriou; Periklis Gogas; Konstantinos Diamantaras

Algorithmic Finance (2015), 4:1-2, 69-79
DOI: 10.3233/AF-150044

Published: Abstract, PDF.
Archived: SSRN.

Abstract

The microstructural approach to the exchange rate market claims that order flows on a currency can accurately reflect the short-run dynamics of its exchange rate. In this paper, instead of focusing on order flows analysis we employ an alternative microstructural approach: We focus on investors' sentiment on a given exchange rate as a possible predictor of its future evolution. As a proxy of investors' sentiment we use StockTwits posts, a message board dedicated to finance. Within StockTwits investors are asked to explicitly state their market expectations. We collect daily data on the nominal exchange rate of four currencies against the U.S. dollar and the extracted market sentiment for the year 2013. Employing econometric and machine learning methodologies we develop models that forecast in out-of-sample exercise the future direction of the four exchange rates. Our empirical findings reject the Efficient Market Hypothesis even in its weak form for all four exchange rates. Overall, we find evidence that investors' sentiment as expressed in public message boards can be an additional source of information regarding the future directional movement of the exchange rates to the ones proposed by economic theory.

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University of Bridgeport

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Stanford University

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Harvard University

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AT&T Labs Research

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Boston University

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Stanford University

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Massachusetts Institute of Technology

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University of Chicago

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Wolfram Research

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Peter Bossaerts

California Institute of Technology

Emanuel Derman

Columbia University

Ming-Yang Kao

Northwestern University

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University of Maryland

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Lawrence Berkeley National Laboratory

Richard J. Lipton

Georgia Tech

Avi Silberschatz

Yale University

Robert Webb

University of Virginia

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Giovanni Barone-Adesi

University of Lugano

Bruce Lehmann

University of California, San Diego

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