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Selective Attention in Exchange Rate Forecasting

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  • Svatopluk Kapounek
  • Zuzana Kučerová
  • Evžen Kočenda

Abstract

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 smaller sizes models accounting for the presence of selective attention offer improved fitting and forecasting results. Specifically, we document a growing impact of foreign trade and monetary policy news on the euro/dollar exchange rate following the global financial crisis. Overall, our results point to the existence of selective attention in the case of most currency pairs.

Suggested Citation

  • Svatopluk Kapounek & Zuzana Kučerová & Evžen Kočenda, 2022. "Selective Attention in Exchange Rate Forecasting," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 23(2), pages 210-229, May.
  • Handle: RePEc:taf:hbhfxx:v:23:y:2022:i:2:p:210-229
    DOI: 10.1080/15427560.2020.1865355
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    1. Martina Halouskov'a & Daniel Stav{s}ek & Mat'uv{s} Horv'ath, 2022. "The role of investor attention in global asset price variation during the invasion of Ukraine," Papers 2205.05985, arXiv.org, revised Aug 2022.

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    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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