Long-Term Asset Allocation, Risk Tolerance and Market Sentiment

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See all articles by Deniz Erdemlioglu

Deniz Erdemlioglu

IESEG School of Management, LEM-CNRS 9221, France

Robert Joliet

IESEG School of Management Lille/Paris; French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221

Date Written: April 16, 2019

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 are 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

JEL Classification: C61, D81, G11, G12, G14

Suggested Citation

Erdemlioglu, Deniz and Joliet, Robert, Long-Term Asset Allocation, Risk Tolerance and Market Sentiment (April 16, 2019). Journal of International Financial Markets, Institutions and Money, Forthcoming. Available at SSRN: https://ssrn.com/abstract=

Deniz Erdemlioglu (Contact Author)

IESEG School of Management, LEM-CNRS 9221, France ( email )

3 rue de la Digue
Lille, 59000
France

HOME PAGE: http://www.denizerdemlioglu.com

Robert Joliet

IESEG School of Management Lille/Paris ( email )

Rue de la Digue 3
LILLE, 59000
France
+33 320 545 892 (Phone)
+33 320 574 855 (Fax)

HOME PAGE: http://www.ieseg.fr

French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221 ( email )

60 Boulevard Vauban
LILLE, 59016
France

HOME PAGE: http://lem.cnrs.fr

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