Information spillover and cross-predictability of currency returns: An analysis via Machine Learning

Yuecheng Jia, Yuzheng Liu, Yangru Wu and Shu Yan

Journal of Banking & Finance, 2024, vol. 169, issue C

Abstract: This paper documents significant cross-return predictability of news variables, derived from textual analysis of news articles, for a broad cross-section of currencies. By employing forecasts based on the Least Absolute Shrinkage and Selection Operator (LASSO) that incorporate both news variables and forward discounts, we develop a notably profitable trading strategy. This strategy proves robust against transaction costs, risk adjustments, and controls for currency characteristics. Further analyses indicate that both risks and market frictions contribute to the profitability of the trading strategy, highlighting the crucial role of news in financial markets.

Keywords: Currency return; Cross-predictability; News; Information spillover; LASSO (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:169:y:2024:i:c:s0378426624002279

DOI: 10.1016/j.jbankfin.2024.107313

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