Selective Attention in Exchange Rate Forecasting

0531234 - ÚTIA 2021 JP eng V - Research Report
Kapounek, S. - Kučerová, Z. - Kočenda, Evžen
Selective Attention in Exchange Rate Forecasting.
Kyoto: Kyoto Institute of Economic Studies, 2020. 31 s. KIER Discussion Papers Series, 1035.
Institutional support: RVO:67985556
Keywords : exchange rate * selective attention * news * dynamic model averaging
OECD category: Finance
http://library.utia.cas.cz/separaty/2020/E/kocenda-0531234.pdf

We analyze the exchange rate forecasting performance under the assumption of selective attention. Although currency markets react to a variety of different information, we hypothesize that market participants process only a limited amount of information. Our analysis includes more than 100,000 news articles relevant to the six most-traded foreign exchange currency pairs for the period of 1979–2016. We employ a dynamic model averaging approach to reduce model selection uncertainty and to identify time-varying probability to include regressors in our models. Our results show that considering selective attention improves forecasting results. Specifically, we document a growing impact of foreign trade and monetary policy news on the Euro/United States of America dollar currency pair following the global financial crisis. Overall, our results point to the existence of selective attention in the case of most currency pairs.
Permanent Link: http://hdl.handle.net/11104/0310090