Investor Attention and FX Market Volatility
46 Pages Posted: 15 Mar 2012 Last revised: 7 Jan 2013
Date Written: March 14, 2012
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: Suggested Citation