Selective Attention in Exchange Rate Forecasting

Svatopluk Kapounek, Evžen Kočenda and Zuzana Kucerova

No 8901, CESifo Working Paper Series from CESifo

Abstract: We analyze the exchange rate forecasting performance under the assumption of selective attention. Although currency markets react to a variety of different information, we hypothesize that market participants process only a limited amount of information. Our analysis includes more than 100,000 news articles relevant to the six most-traded foreign exchange currency pairs for the period of 1979–2016. We employ a dynamic model averaging approach to reduce model selection uncertainty and to identify time-varying probability to include regressors in our models. Our results show that smaller sizes models accounting for the presence of selective attention offer improved fitting and forecasting results. Specifically, we document a growing impact of foreign trade and monetary policy news on the euro/dollar exchange rate following the global financial crisis. Overall, our results point to the existence of selective attention in the case of most currency pairs.

Keywords: exchange rate; selective attention; news; forecasting; dynamic model averaging (search for similar items in EconPapers)
JEL-codes: C11 F33 G41 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-for and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Selective Attention in Exchange Rate Forecasting (2022)
Working Paper: Selective Attention in Exchange Rate Forecasting (2020)
Working Paper: Selective Attention in Exchange Rate Forecasting (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8901

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