Long-term asset allocation, risk tolerance and market sentiment

Deniz Erdemlioglu (1) , Robert Joliet (1)

1 LEM - Lille économie management - UMR 9221

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.

Mots clés: Asset management; Portfolio choice; Investment horizons; Investor and market sentiment; Fund performance; Signal processing

Domaines: Sciences de l'Homme et Société; Gestion et management

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