What can we Learn from Euro-Dollar Tweets?

Vahid Gholampour, Eric van Wincoop

NBER Working Paper No. 23293
Issued in March 2017
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

We use 633 days of tweets about the Euro/dollar exchange rate to determine their information content and the profitability of trading based on Twitter Sentiment. We develop a detailed lexicon used by FX traders to translate verbal tweets into positive, negative and neutral opinions. The methodologically novel aspect of our approach is the use of a model with heterogeneous private information to interpret the data from FX tweets. After estimating model parameters, we compute the Sharpe ratio from a trading strategy based on Twitter Sentiment. The Sharpe ratio outperforms that based on the well-known carry trade and is precisely estimated.

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Document Object Identifier (DOI): 10.3386/w23293

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