engleski

Empirical analysis of dynamic spillovers between exchange rate return, return volatility and investor sentiment

This paper analyzes the effects of investors’ sentiment, return, and risk (returnvolatility) series on one to another of the selected exchange rates. The empirical analysis consists of a time-varying inter- dependence between the observed variables, with the focus on spillovers between the variables. Monthly data on the index Sentix, exchange rates EUR- USD, EUR-CHF, and EUR-JPY are analyzed from February 2003 to December 2019. The applied methodology consists of vector autoregression models (VAR) with Diebold and Yilmaz (2009, 2012) spillover indices. The results of the empirical research indicate that using static analysis could result in misleading conclusions, with dynamic analysis indicating that the financial crisis of 2007-2008 and specific negative events increase the spillovers of shocks between the observed variables for all three exchange rates. The sources of shocks in the model change over time, due to variables changing their positions being net emitters or net receivers of shocks. This also proves that traditional asset pricing theory cannot fully explain variation in return and return volatility since the investor sentiment has an impact on the exchange rate return and return volatility. Furthermore, the dynamic analysis should be taken into consideration in future analysis and pricing models. We find that investors can use investor sentiment as an indicator to predict returns-volatility in general. Finally, the robustness of the results is checked. Thus, the results of this study could be used in dynamic portfolio rebalancing over time to achieve specific investment goals.

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

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