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Dynamic rebalancing portfolio models with analyses of investor sentiment

Author

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  • Yu, Jing-Rung
  • Chiou, W. Paul
  • Hung, Cing-Hung
  • Dong, Wen-Kuei
  • Chang, Yi-Hsuan

Abstract

This study extends the risky portfolio models that use historical returns while incorporating investor sentiments in optimizing asset allocations. To ensure the practicality, the portfolio models that are suitable to strategize a large number of assets are developed by advancing two linearized objectives, the Omega ratio and Conditional Value-at-Risk (CVaR). Transaction costs, short selling, and adjustment of lower bounds of weights are considered in dynamic portfolio rebalancing. More than ten million messages from Twitter are analyzed to generate sentiment scores in managing portfolio rebalancing. Using the data of the S&P 500 composite stocks, our empirical results show the sentiment-triggered dynamic rebalancing portfolios ex post outperform their corresponding fixed-period rebalancing models and the naïve diversification portfolio. The flexibility in adjusting the asset allocations according to investor sentiments improves realized portfolio performance. The proposed models demonstrate self-correction by detecting investor sentiments, resulting in more effective asset management.

Suggested Citation

  • Yu, Jing-Rung & Chiou, W. Paul & Hung, Cing-Hung & Dong, Wen-Kuei & Chang, Yi-Hsuan, 2022. "Dynamic rebalancing portfolio models with analyses of investor sentiment," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 1-13.
    • Handle: RePEc:eee:reveco:v:77:y:2022:i:c:p:1-13
    DOI: 10.1016/j.iref.2021.09.003
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    Cited by:

    1. Martina Halouskov'a & Daniel Stav{s}ek & Mat'uv{s} Horv'ath, 2022. "The role of investor attention in global asset price variation during the invasion of Ukraine," Papers 2205.05985, arXiv.org, revised Aug 2022.
    2. Halousková, Martina & Stašek, Daniel & Horváth, Matúš, 2022. "The role of investor attention in global asset price variation during the invasion of Ukraine," Finance Research Letters, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Social media; Dynamic asset allocation; Short selling; Transaction costs; Sentiment analysis;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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