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Long-term asset allocation, risk tolerance and market sentiment

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.
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https://hal.archives-ouvertes.fr/hal-02510242
Contributor : Isabelle Celet <>
Submitted on : Tuesday, March 17, 2020 - 3:46:25 PM
Last modification on : Wednesday, March 18, 2020 - 1:36:13 AM

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Deniz Erdemlioglu, Robert Joliet. Long-term asset allocation, risk tolerance and market sentiment. Journal of International Financial Markets, Institutions and Money, Elsevier, 2019, 62, pp.1-19. ⟨10.1016/j.intfin.2019.04.004⟩. ⟨hal-02510242⟩

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