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News sentiment and overshooting of exchange rates

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  • Stefan Feuerriegel
  • Georg Wolff
  • Dirk Neumann

Abstract

In a globalized world, the volume of international trade is based on both import and export prices, thereby making a country’s economy highly dependent on exchange rates. In order to study exchange rate movements, one frequently exploits the so-called Dornbusch overshooting model. However, the model is controversial from a theoretical point of view: it explains exchange rate movements by a number of fundamental variables but ignores how novel information in the form of news can enter the market. As a remedy, this article adjusts for information dissemination by performing a multivariate analysis to compare the classical overshooting model with an extended variant that includes news sentiment. Our results show that news sentiment has a substantial explanatory power of 11% of the exchange rate forecasting error variance. In addition, we also find statistical evidence that a shock in news sentiment may lead to overshooting.

Suggested Citation

  • Stefan Feuerriegel & Georg Wolff & Dirk Neumann, 2016. "News sentiment and overshooting of exchange rates," Applied Economics, Taylor & Francis Journals, vol. 48(44), pages 4238-4250, September.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:44:p:4238-4250
    DOI: 10.1080/00036846.2016.1153796
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    References listed on IDEAS

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    1. Rudiger Dornbusch, 1980. "Exchange Rate Economics: Where Do We Stand?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 143-206.
    2. Mr. Kenneth Rogoff, 2002. "Dornbusch’s Overshooting Model After Twenty-Five Years," IMF Working Papers 2002/039, International Monetary Fund.
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    Cited by:

    1. Khumalo, Zitsile Zamantungwa & Eita, Joel Hinaunye & Choga, Ireen, 2020. "An Empirical Test of Real Exchange Rate Overshooting in Selected African Countries," MPRA Paper 101303, University Library of Munich, Germany.
    2. Stefan Feuerriegel & Helmut Prendinger, 2018. "News-based trading strategies," Papers 1807.06824, arXiv.org.
    3. Chi-Wei Su & Xu-Yu Cai & Ran Tao, 2020. "Can Stock Investor Sentiment Be Contagious in China?," Sustainability, MDPI, vol. 12(4), pages 1-16, February.

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