Long-Term Asset Allocation, Risk Tolerance and Market Sentiment
Posted: 3 Jun 2019
Date Written: April 16, 2019
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
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