Exchange Rate Market Sentiment Analysis of Major Global Currencies

K. S. Madhava Rao; Anjana Ramachandran

doi:10.4236/ojs.2014.41006

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Exchange Rate Market Sentiment Analysis of Major Global Currencies

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DOI: 10.4236/ojs.2014.41006 3,926 Downloads 5,692 Views Citations

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K. S. Madhava Rao, Anjana Ramachandran

Affiliation(s)

Department of Mathematics, University of Botswana, Gaborone, Botswana.
Department of Statistics, University of Botswana, Gaborone, Botswana.

ABSTRACT

The paper deals with the analysis of market sentiments in exchange rates which are of great interest to trading individuals and institutional investors. For example, an institutional investor or a trading individual makes better investments and minimizes losses when equipped with an understanding of market sentiments in weekly or monthly exchange returns. In the approach suggested here, a typical market sentiment is defined on the basis of the certain function of the mean and the standard error of the logarithm of the ratio of successive daily exchange rates. Based on this surmise, the market sentiments are classified into various states, whereby states are defined according to the perceptions of the market player. A multinomial probability model is built to capture the uncertainties in market sentiments. Two asymptotically distribution-free tests, namely the chi-square and the likelihood ratio test of goodness of fit for the hypothesis of the symmetry in market sentiments are suggested. Two different measures of market sentiments are proposed. The approach advocated here will be of interest to researchers, exchange rate traders and financial analysts. As an application of the proposed line of approach, we analyze weekly market sentiments that govern exchange rates of the major global currencies—EUR, GBP, SDR, YEN, ZAR, USD, data from 2001-2012. Some interesting conclusions are revealed based on the data analysis.

KEYWORDS

Chi-Square Tests; Exchange Rates; Market Sentiments; Weekly States

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

K. Rao and A. Ramachandran, "Exchange Rate Market Sentiment Analysis of Major Global Currencies," Open Journal of Statistics, Vol. 4 No. 1, 2014, pp. 49-69. doi: 10.4236/ojs.2014.41006.

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