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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Will News Sentiment Save Dollar Carry From Crash? |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 58 |
| Date | 2023 |
| Abstract Text | We aim to enhance the performance of the standard dollar carry by harnessing news sentiment. Our study focuses on determining the impact of news sentiment on the average spot returns of the G10 currency basket against the USD at the monthly level. The empirical analyses reveal the existence of a predictive relationship between the two variables. Additionally, we observe that the effect of USD news sentiment varies across different quantiles of the average spot returns. Given that, we propose two news sentiment enhanced dollar carry strategies. The first strategy exploits the result of our initial findings, while the second one further leverages information from both of our research insights. The predictability manifests itself in the form of higher Sharpe ratios of our two augmented dollar carry strategies over both the whole sample period (February 2000 to March 2022) and the out-of-sample period (January 2014 to March 2022) than that of the standard dollar carry when transaction costs are disregarded. Notably, during the out-ofsample period, the second strategy generates a Sharpe ratio of 0.48 and the first strategy 0.43, compared to the benchmark’s -0.22. Despite the fact that transaction costs can eat up a large part of the profits, our findings suggest that news sentiment still has the ability to improve the dollar carry strategy by achieving excess returns. This is evident in the out-of-sample period, where news sentiment based strategies continue to outperform the benchmark. |
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