Does investor attention matter? The attention-return relationships in FX markets

We empirically investigate whether investor attention matters for the movements of exchange rates from nine countries by utilizing Google Search Volume as the proxy for attention. In-sample results demonstrate mutiplicate relationships between investor attention and currency returns. (1) Lagged investor attention significantly influences currency returns at present, and this effect is short-lived (usually at first lag). (2) The sign of past currency return matters for the magnitude of effects of investor attention on current return. Typically, the influence of past returns on the attention-return relationship alleviates market inefficiency and thus returns are less predictable merely based on past attention. (3) There exists a nonlinear relationship between investor attention and exchange rate returns. Consistent with in-sample results, investor attention provides a statistically significant out-of-sample forecast. These empirical findings indicate that investor attention contains information that influences the movements of exchange rates.