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Long-term asset allocation, risk tolerance and market sentiment

Deniz Erdemlioglu and Robert Joliet ()

Journal of International Financial Markets, Institutions and Money, 2019, vol. 62, issue C, 1-19

Abstract: This paper studies optimal equity portfolios with long-term horizon under heterogeneous risk aversion levels. We focus on European stocks and empirically show that contemporaneous excess returns of semi-active strategies are negatively associated with market conditions and sentiment. Consistent with our long-horizon perspective, we find that the effects of sentiment measures on semi-active portfolio returns are sizeable and economically relevant, particularly in bull (post-crisis) periods, even after controlling for the five Fama-French factors, momentum, macro indicators and political uncertainty shocks either globally or country-wise. By contrast, the effects of sentiment measures on the passive (benchmark) portfolio appear to be negligible. The results further indicate that realized portfolio returns generated from our long-term strategies are considerably resilient to the episodes of flight-to-safety (risk-off) regimes.

Keywords: Asset management; Portfolio choice; Investment horizons; Investor and market sentiment; Fund performance; Signal processing (search for similar items in EconPapers)
JEL-codes: C61 D81 G11 G12 G14 (search for similar items in EconPapers)
Date: 2019
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