Connectedness in exchange rates and news sentiment in the Asia‐Pacific region

Abstract

Exchange rate co‐movements can be pathways for contagion and reduce the ability for diversification. News sentiment on the currency, as a high frequency proxy for market expectations, may affect exchange rate dynamics. We use the connectedness approach from Diebold and Yilmaz (International Journal of Forecasting, 2012, 28(1), 57–66) to model co‐movements of exchange rate changes and news sentiment of 14 Asian‐Pacific currencies from 1998 to 2022. Our results indicate that the connectedness between the exchange rate changes increases over time, especially among advanced economies after the Global Financial Crisis. We do not find evidence that currency news sentiment can serve as an early warning indicator for exchange rate changes.