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Selective Attention in Exchange Rate Forecasting

Svatopluk Kapounek (), Zuzana Kucerova () and Evžen Kočenda

No 1035, KIER Working Papers from Kyoto University, Institute of Economic Research

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 considering selective attention improves forecasting results. Specifically, we document a growing impact of foreign trade and monetary policy news on the Euro/United States of America dollar currency pair 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; dynamic model averaging (search for similar items in EconPapers)
JEL-codes: C11 F33 G41 (search for similar items in EconPapers)
Pages: 31pages
Date: 2020-07
New Economics Papers: this item is included in nep-for and nep-mon
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Related works:
Journal Article: Selective Attention in Exchange Rate Forecasting (2022) Downloads
Working Paper: Selective Attention in Exchange Rate Forecasting (2021) Downloads
Working Paper: Selective Attention in Exchange Rate Forecasting (2020) Downloads
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