What drives investors' behaviour in different FX market segments? A VAR-based return decomposition analysis

Olli Castrén, Chiara Osbat and Matthias Sydow

No 706, Working Paper Series from European Central Bank

Abstract: We apply the Campbell-Shiller return decomposition to exchange rate returns and fundamentals in a stationary panel vector autoregression framework. The return decomposition is then used to analyse how different investor segments react to news as captured by the different return components. The results suggest that intrinsic value news are dominating for equity investors and speculative money market investors while investors in currency option markets react strongly to expected return news. The equity and speculative money market investors seem able to distinguish between transitory and permanent FX movements while options investors mainly focus on transitory movements. We also find evidence that offsetting impact on the various return components can blur the effect of macroeconomic data releases on aggregate FX excess returns. JEL Classification: C23, F31, F32, G15

Keywords: FX return prediction; investor flows; news surprises; panel estimation; stationary VAR. (search for similar items in EconPapers)
Date: 2006-12
Note: 261931
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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