Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/27186 
Year of Publication: 
2007
Series/Report no.: 
Diskussionsbeitrag No. 376
Publisher: 
Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, Hannover
Abstract: 
How is it possible that exchange rates move in the long run towards fundamentals, while professionals form consistently irrational exchange rate expectations? We look at this puzzle from a different perspective by analyzing investor sentiment in the US-dollar market. First, long-horizon regressions show that investor sentiment is connected with exchange rate returns at longer horizons, i.e. more than two years. Second, sentiment is cointegrated with fundamentals, whereas third, this relation becomes stronger, the larger exchange rate's misalignment from long-run PPP. In sum, investor sentiment's behavior in the US-dollar market closely matches with established facts of empirical exchange rate research.
Subjects: 
Exchange rates
investor sentiment
long-horizon regression
threshold VECM
JEL: 
F31
G14
Document Type: 
Working Paper

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