Investor Attention and FX Market Volatility

46 Pages Posted: 15 Mar 2012 Last revised: 7 Jan 2013

See all articles by Arben Kita

Arben Kita

University of Southampton

Qingwei Wang

Cardiff University - Cardiff Business School; ZEW – Leibniz Centre for European Economic Research

Date Written: March 14, 2012

Abstract

We study whether investors' active information acquisition, measured by search volume in Google (SVI), affects the dynamics of currency prices. Significantly correlated with trading activities of major players, SVI has a strong effect on FX market volatility beyond the volatility of macroeconomic fundamentals: (1) an increase in SVI is associated with higher volatility in both time series and cross section; (2) causal effects run mainly from SVI to volatility. In addition, SVI is related to currency risk premium and carry trade returns. Our results suggest that investor attention is a priced source of risk in FX markets.

Keywords: Investor Attention, FX Volatility, Option Pricing, GARCH

JEL Classification: G12, G14

Suggested Citation

Kita, Arben and Wang, Qingwei, Investor Attention and FX Market Volatility (March 14, 2012). Available at SSRN: https://ssrn.com/abstract=2022100 or http://dx.doi.org/10.2139/ssrn.2022100

Arben Kita

University of Southampton ( email )

Highfield Campus
Building 2
Southampton, Hampshire SO17 1BJ
United Kingdom

Qingwei Wang (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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