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Investor sentiment in the US-dollar: Longer-term, non-linear orientation on PPP

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Author Info
Menkhoff, Lukas
Rebitzky, Rafael R.

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Abstract

How is it possible that exchange rates move in the long run towards fundamentals, while professionals form consistently irrational exchange rate expectations? We look at this puzzle from a different perspective by analyzing investor sentiment in the US-dollar market. First, long-horizon regressions show that investor sentiment is connected with exchange rate returns at longer horizons, i.e. more than two years. Second, sentiment is cointegrated with fundamentals, whereas third, this relation becomes stronger, the larger exchange rate's misalignment from long-run PPP. In sum, investor sentiment's behavior in the US-dollar market closely matches with established facts of empirical exchange rate research.

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Publisher Info
Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 15 (2008)
Issue (Month): 3 (June)
Pages: 455-467
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Handle: RePEc:eee:empfin:v:15:y:2008:i:3:p:455-467

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Schmeling, Maik, 2008. "Investor sentiment and stock returns: Some international evidence," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-407, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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