Factor Timing with Investor Sentiment

Fuwei Jiang (), Wei Ning () and Hao Xue ()
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Fuwei Jiang: Central University of Finance and Economics
Wei Ning: Southwestern University of Finance and Economics
Hao Xue: Central University of Finance and Economics

Annals of Economics and Finance, 2023, vol. 24, issue 2, 401-437

Abstract: This paper studies the relation between investor sentiment and factor tim- ing portfolio within the factor zoo. We consider both the mean-variance and constant relative risk aversion (CRRA) investor utility objectives, and use a nonparametric approach to characterize the dependence of factor timing port- folio weight on investor sentiment. We focus on a sample of 55 characteristics- based factors and extract the largest sparse principal components to invest. Empirically, we find that the investor sentiment is a good guidance to fac- tor timing from July 1965 to December 2019, and the result is also robust to out-of-sample evaluation and transaction cost.

Keywords: Factor timing; Investor sentiment; Sparse PCA; Nonparametric regression (search for similar items in EconPapers)
JEL-codes: C14 C55 G11 G12 G41 (search for similar items in EconPapers)
Date: 2023
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