Benefiting from the frightened herd: Dynamic asset allocation amid panic sentiment

Fenglin Wu, Yongdong Shi, Xiong Xiong, Yanshuang Li and Zibing Dong

Economics Letters, 2024, vol. 245, issue C

Abstract: This paper introduces an innovative dynamic asset allocation approach to hedge against panic sentiment and demonstrates that adopting such an anti-panic strategy can be beneficial. We first develop a novel measure of panic sentiment and analyze its spillover effects across major stock markets. The strategy’s diversification advantages in mitigating panic sentiment are then evaluated. Backtesting results reveal substantial long-term excess returns over benchmarks, with risk-adjusted metrics and statistical tests confirming the robustness of these results.

Keywords: Panic sentiment; Asset allocation; Behavioral finance; Network connectedness (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:245:y:2024:i:c:s0165176524005366

DOI: 10.1016/j.econlet.2024.112052

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