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Factor Timing with Investor Sentiment

Author

Listed:
  • Fuwei Jiang

    (Central University of Finance and Economics)

  • Wei Ning

    (Southwestern University of Finance and Economics)

  • Hao Xue

    (Central University of Finance and Economics)

Abstract

This paper studies the relation between investor sentiment and factor tim- ing portfolio within the factor zoo. We consider both the mean-variance and constant relative risk aversion (CRRA) investor utility objectives, and use a nonparametric approach to characterize the dependence of factor timing port- folio weight on investor sentiment. We focus on a sample of 55 characteristics- based factors and extract the largest sparse principal components to invest. Empirically, we find that the investor sentiment is a good guidance to fac- tor timing from July 1965 to December 2019, and the result is also robust to out-of-sample evaluation and transaction cost.

Suggested Citation

  • Fuwei Jiang & Wei Ning & Hao Xue, 2023. "Factor Timing with Investor Sentiment," Annals of Economics and Finance, Society for AEF, vol. 24(2), pages 401-437, November.
    • Handle: RePEc:cuf:journl:y:2023:v:24:i:2:jiangningxue
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    More about this item

    Keywords

    Factor timing; Investor sentiment; Sparse PCA; Nonparametric regression;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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