Emotions Matter: Sentiment and Momentum in Foreign Exchange

Matthias W. Uhl

Journal of Behavioral Finance, 2017, vol. 18, issue 3, 249-257

Abstract: The author introduces news sentiment as a variable that can explain and predict subsequent changes in the USD/EUR exchange rate and therefore close a gap in the foreign exchange literature. By applying the concept of frequency filtering from the domain of electrical engineering, the author shows an innovative way of filtering for noise not only in news sentiment, but also in price momentum. The author finds that news sentiment is not correlated to price momentum, and that trading strategies based on news sentiment achieve around twice as high information ratios (up to 0.9) than with trading strategies based on price momentum.

Date: 2017
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DOI: 10.1080/15427560.2017.1332061

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