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Investor sentiment in the US-dollar: longer-term, nonlinear orientation on PPP

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  • Menkhoff, Lukas
  • Rebitzky, Rafael

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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  • Menkhoff, Lukas & Rebitzky, Rafael, 2007. "Investor sentiment in the US-dollar: longer-term, nonlinear orientation on PPP," Hannover Economic Papers (HEP) dp-376, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  • Handle: RePEc:han:dpaper:dp-376
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    Cited by:

    1. Aristei, David & Martelli, Duccio, 2014. "Sovereign bond yield spreads and market sentiment and expectations: Empirical evidence from Euro area countries," Journal of Economics and Business, Elsevier, vol. 76(C), pages 55-84.
    2. Schmeling, Maik, 2009. "Investor sentiment and stock returns: Some international evidence," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 394-408, June.
    3. Jasman Tuyon & Zamri Ahmad & Hylmee Matahir, 2016. "The Roles of Investor Sentiment in Malaysian Stock Market," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 12(Suppl. 1), pages 43-75.
    4. repec:got:cegedp:89 is not listed on IDEAS
    5. Hermann Remsperger & Adalbert Winkler, 2009. "Welchen Einfluss hat der Wechselkurs auf die internationale Rolle von US-Dollar und Euro?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 10(1), pages 21-38, February.
    6. Kühl, Michael, 2009. "Excess comovements between the Euro/US dollar and British pound/US dollar exchange rates," Center for European, Governance and Economic Development Research Discussion Papers 89, University of Goettingen, Department of Economics.

    More about this item

    Keywords

    Exchange rates; investor sentiment; long-horizon regression; threshold VECM;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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