Investor sentiment and dollar-pound exchange rate returns : evidence from over a century of data using a cross-quantilogram approach

Abstract

In this paper, we investigate the cross-quantile dependence between investor sentiment and exchange rate returns using an extreme quantile approach and based on daily data covering the period January 4, 1905 to January 3, 2006. As a proxy of investor sentiment, we use the bull (positive) minus bear (negative) spread of the sentiment measure constructed by Garcia (2013). We find that the lower quantiles of investor sentiment have a positive and significant effect on the quantiles of dollar-pound exchange rate returns. However, the sign of dependence is reversed for the median to higher quantiles of the distribution of the sentiment. Our finding holds even after controlling for the performance of the equity market, and provides additional evidence that investor sentiment can augment conventional predictors with respect to the future evolution of exchange rate returns.