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Selective Attention in Exchange Rate Forecasting

Author

Listed:
  • Svatopluk Kapounek

    () (Mendel University in Brno, Faculty of Business and Economics)

  • Zuzana Kucerova

    () (Mendel University in Brno, Faculty of Business and Economics)

  • Evzen Kocenda

    () (Institute of Economic Studies, Charles University)

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 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.

Suggested Citation

  • Svatopluk Kapounek & Zuzana Kucerova & Evzen Kocenda, 2020. "Selective Attention in Exchange Rate Forecasting," KIER Working Papers 1035, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:1035
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP1035.pdf
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    More about this item

    Keywords

    exchange rate; selective attention; news; dynamic model averaging;

    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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