D80 - Information, Knowledge, and Uncertainty: GeneralReturn

Using the big data of news texts and a novel, news extended exchange rate model, we investigate the impact of media news on major exchange rates. To present the impact of the U.S. Dollar related news on EUR/USD and GBP/USD, we first use a machine learning model and detect which news topics relate to U.S. Dollar. Next, we calculate the attention to the U.S. Dollar related news topics over time. Eventually, we visualize how Exchange rates react to shocks in the attention to the U.S. Dollar related news topics. The impulse response functions of U.S. Dollar bilateral rates show that exchange rates respond to the U.S. Dollar related news and to the economic uncertainty news shocks with statistical significance in several periods after the shock. Forecast error decomposition documents that 25-27% of exchange rate variation in the long run comes from the news. The results reveal, that news add valuable information to macroeconomic fundamentals for identifying exchange rates, and exchange rates are better identified when both, macroeconomic and news information are used together. These findings are important for exchange rate modeling.