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SHOCK SPILLOVERS BETWEEN EXCHANGE RATE RETURN, VOLATILITY AND INVESTOR SENTIMENT

This research deals with the effects of investor’s sentiment on the return and risk series of selected exchange rates. The analysis allows for a time- varying inter-dependence between the observed variables to estimate the spillovers between them. The main goal is to determine if the investor’s sentiment affects the return and risk series and if there exists feedback as well. For this purpose, monthly data on the index Sentix and exchange rates EUR-USD, EUR-CHF and EUR-JPY were collected for the period February 2003-December 2019. The applied methodology consists of vector autoregression models (VAR) with Diebold and Yilmaz (2009, 2012) spillover indices. The main findings show that using static analysis could result in misleading conclusions. Furthermore, the dynamic analysis shows that the financial crisis of 2007-2008 and specific negative events increase the spillovers of shock between the observed variables for all three exchange rates. The net receivers and emitters of shocks in the system also change over time. Thus, the dynamic analysis should be taken into consideration in future analysis and pricing models. Finally, the robustness of the results was checked. Thus, results of this study could be used in dynamic portfolio rebalancing over time in order to achieve specific investment goals.

behavioral finance, exchange rate return, shock spillover, Vector Autoregression, Sentix index

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