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Media Sentiment and Currency Reversals

Published online by Cambridge University Press:  15 June 2023

Ilias Filippou Open the ORCID record for Ilias Filippou [Opens in a new window] ,
Mark P. Taylor Open the ORCID record for Mark P. Taylor [Opens in a new window]  and
Zigan Wang Open the ORCID record for Zigan Wang [Opens in a new window]
Ilias Filippou
Affiliation:
Washington University in St. Louis John M. Olin School of Business IliasFilippou@wustl.edu
Mark P. Taylor*
Affiliation:
Washington University in St. Louis John M. Olin School of Business
Zigan Wang
Affiliation:
Tsinghua University School of Economics and Management and Shenzhen International Graduate School wangzg@sem.tsinghua.edu.cn
*
Mark.P.Taylor@wustl.edu (corresponding author)
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Abstract

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Analyzing 48 foreign exchange (FX) rates and 1.2 million FX-related news articles over a 35-year period, using digital textual analysis, we find that a currency reversal investment strategy that buys (sells) currencies with low (high) media sentiment offers strong positive and statistically significant returns and Sharpe ratios. The results are robust and the strategy adds value over other currency premia determinants. Analysts’ forecasts systematically mispredict the reversal strategy. This is the first article to show that price reversals based on media sentiment are a well-defined feature of the FX market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 3 , May 2024 , pp. 1401 - 1429
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee and Hendrik Bessembinder (the editor) for constructive and helpful comments on a previous version of the article. We also thank Xiang Fang, Yang Liu, Thomas Maurer, George Panayotov, Lucio Sarno, Qi Xu, and Guofu Zhou for helpful discussions. We thank Yan Li for research assistance.

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