News Sentiment and Foreign Exchange Markets

This thesis aims at quantifying foreign exchange investors' beliefs about future fundamentals through extracting a news sentiment score from economic news articles using quantitative content analysis. It aims at contributing to a better understanding of the FX market, thereby closing the gap between exchange rate economics and what actually determines, or drives, exchange rates. OLS regressions of the news sentiment measurement on the GBP/USD exchange rate show that news about future fundamentals are incorporated in the exchange rate within the same day of the news' arrival. Incorporating investors' beliefs in existing exchange rate models yields a better understanding of the FX market and possibly more accurate forecasting ability of these models.