Long-term asset allocation, risk tolerance and market sentiment

Deniz Erdemlioglu and Robert Joliet (r.joliet@ieseg.fr)
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Deniz Erdemlioglu: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique

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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)
Date: 2019-09
Note: View the original document on HAL open archive server: https://hal.science/hal-02510242
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Citations: View citations in EconPapers (4)

Published in Journal of International Financial Markets, Institutions and Money, 2019, 62, pp.1-19. ⟨10.1016/j.intfin.2019.04.004⟩

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Journal Article: Long-term asset allocation, risk tolerance and market sentiment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02510242

DOI: 10.1016/j.intfin.2019.04.004

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