Unveiling news impact on exchange rates: a hybrid model using NLP and LDA techniques

Teona Shugliashvili and Erekle Pirveli

Applied Economic Analysis, 2025, vol. 33, issue 99, 184-205

Abstract: PurposeThis study aims to investigate the influence of U.S. dollar-related news on EUR/US$ exchange rate using a novel hybrid news-fundamentals-based VAR model applied to 18 years of monthly data.Design/methodology/approachLeveraging Latent Dirichlet Allocation (LDA), the authors identify the top 5 U.S. dollar-related news topics, quantify the attention they receive over time using Shannon’s entropy, and integrate these news-generated metrics with news-constructed economic uncertainty indices and Taylor rule fundamentals into the VAR model. Through impulse-response analysis and forecast error decomposition, the authors examine how exchange rates react to shocks from the identified US$-related news topics and economic uncertainty captured by the news.FindingsThe findings reveal that news related to the US dollar and economic uncertainty account for 29% of long-term EUR/US$ variation. These results are robust, validated through robustness checks, Granger causality tests, sensitivity analysis and applying the same model to the GBP/USD exchange rate.Originality/valueCombining news attention metrics with macroeconomic fundamentals enhances exchange rate identification, outperforming the models that rely solely on the Taylor rule or news variables.

Keywords: Foreign exchange; US dollar; News media; Machine learning; Natural language processing (NLP); Latent Dirichlet allocation (LDA) (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/aea/article/33/99/184/1248 ... hange-rates-a-hybrid (text/html)
https://www.emerald.com/aea/article-pdf/33/99/184/ ... a-04-2024-0183en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:aeapps:aea-04-2024-0183

DOI: 10.1108/AEA-04-2024-0183

Access Statistics for this article

Applied Economic Analysis is currently edited by Carmen D??az-Mora and Francisco Requena

More articles in Applied Economic Analysis from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().