Working Paper: CEPR ID: DP16049
Authors: Ilias Filippou; Mark Taylor; Zigan Wang
Abstract: Analyzing 48 foreign exchange (FX) rates and 1.2 million FX-related news articles over a 35-year period, using digital textual analysis, we find that a currency reversal investment strategy that buys (sells) currencies with low (high) media sentiment offers strong positive and statistically significant returns and Sharpe ratios. The results are robust and the strategy adds value over other currency premia determinants such as carry and momentum. Analysts' forecasts systematically mispredict the reversal strategy. This is the first paper to show that price reversals based on media sentiment are a well-defined feature of the foreign exchange market.
Keywords: fx; media; news; digital text; currency risk premium; currency reversals
JEL Codes: C38; C55; F31; G11; G41; Z13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| currency reversal investment strategy (buying low sentiment, selling high sentiment) (F31) | strong positive returns (G12) |
| analysts' forecasts (G17) | mispredict reversal strategy (C73) |
| lower media sentiment (D79) | depreciation of the US dollar (F31) |
| lower media sentiment (D79) | appreciation of foreign currencies (F31) |
| media sentiment (D79) | future currency excess returns (F31) |
| media sentiment (D79) | price reversals in foreign exchange market (F31) |