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

Lukas Menkhoff and Rafael Rebitzky

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

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.

Keywords: Exchange rates; investor sentiment; long-horizon regression; threshold VECM (search for similar items in EconPapers)
JEL-codes: F31 G14 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2007-09
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Investor sentiment in the US-dollar: Longer-term, non-linear orientation on PPP (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:han:dpaper:dp-376

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