Is Exchange Rate Moody? Estimating the Influence of Market Sentiments With Google Trends

• Main Authors: Michał Chojnowski, Piotr Dybka
• Format: Article
• Language: English
• Published: SGH Warsaw School of Economics, Collegium of Economic Analysis 2017-04-01
• Series: Econometric Research in Finance
• Online Access: https://erfin.org/journal/index.php/erfin/article/view/13

This paper proposes a novel method of exchange rate forecasting. We extend the present value model based on observable fundamentals by including three unobserved fundamentals: credit-market, financial-market, and price-market sentiments. We develop a method of sentiments extraction from Google Trends data on searched queries for different markets. Our method is based on evolutionary algorithms of variable selection and principal component analysis (PCA). Our results show that the extended vector autoregressive model (VAR) which includes markets' sentiment, shows better forecasting capabilities than the model based solely on fundamental variables or the random walk model (naïve forecast).