Social Media Sentiment and the FX Market

Abstract

This is a study of the effect of social media sentiment on pricing and trading fundamentals in the foreign exchange market, with a focus on examining the predictability of prices, the cost and depth of liquidity, and the topography of the global limit order book for a currency pair. Standalone forecasting exercises are combined with event studies to reach conclusions. There is some promise in price forecasting results, but work remains to be done in terms of strategy and hedging applications. Results with respect to FX market structure are less encouraging, with the possible exception of a tight correlation between sentiment and the cost of liquidity.