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

Tihana Škrinjarić (Faculty of Economic and Business, University of Zagreb, Zagreb, Croatia)
Zrinka Lovretin Golubić (Faculty of Economic and Business, University of Zagreb, Zagreb, Croatia)
Zrinka Orlović (Faculty of Economic and Business, University of Zagreb, Zagreb, Croatia)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 7 December 2020

Issue publication date: 11 March 2021

395

Abstract

Purpose

This paper aims to analyze the effects of investors’ sentiment, return and risk series on one to another of 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.

Design/methodology/approach

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, 2011) spillover indices.

Findings

The results of the empirical research indicate that using static analysis could result in misleading conclusions, with dynamic analysis indicating that the financial of 2007-2008 and specific negative events increase the spillovers of shock between the observed variables for all three exchange rates. The sources of shocks in the model change over time because of variables changing their positions being net emitters and net receivers of shocks.

Research limitations/implications

The shortfalls of this study include using the monthly data frequency, as this was available for the authors, namely, investors are interested to obtain new information on a weekly and daily basis, not only monthly. However, at the time of writing this research, we could obtain only monthly data.

Practical implications

As the obtained results are in line with previous literature and were found to be robust, there exists the potential to use such analysis in the future when forecasting risk and return series for portfolio management purposes. Thus, a basic comparison was made regarding the investment strategies, which were based on the results from the estimation. It was shown that using information about shock spillovers could result in strategies that can obtain better portfolio value over time compared to basic benchmark strategies.

Originality/value

First, this paper allows for the spillovers of shocks in variables within the VAR models in all directions. Second, a dynamic analysis is included in the study. Third, the mentioned spillover indices are included in the study as well.

Keywords

Acknowledgements

The authors are grateful to the Editor and Reviewers’ comments, which have improved the final version of this paper.

Funding: This research received no external funding.

Conflicts of interest: The authors declare no conflicts of interest.

Citation

Škrinjarić, T., Lovretin Golubić, Z. and Orlović, Z. (2021), "Empirical analysis of dynamic spillovers between exchange rate return, return volatility and investor sentiment", Studies in Economics and Finance, Vol. 38 No. 1, pp. 86-113. https://doi.org/10.1108/SEF-07-2020-0247

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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