Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia
The impact of economic sentiment on financial portfolios during the recent turmoil
Need to know
- The authors construct 13 individual investor sentiment measures based on Twitter data.
- Investor sentiment has predictive power over the US sectoral returns.
- Incorporating our sentiment into portfolio construction results in Sharpe ratio improvement.
Abstract
This paper aims to assess the influence of economic sentiment on financial portfolios during the recent period of the Covid-19 pandemic and the Russia–Ukraine crisis. We follow a dictionary-based approach to compute sentiment indexes related to 13 US portfolios. Financial sentiment is extracted from a data set of 4 974 000 tweets covering the period from October 4, 2019 to March 23, 2022. For these 13 indexes, we compute their level and variation to capture the new information and we propose three empirical exercises. Using contemporaneous regressions, our results show that the impact is relatively pronounced for 11 out of the 13 portfolios. The unresponsive portfolios are those based on the utilities and consumer staples sectors. Transforming our indexes into first differences allows us to obtain predictive power. In this framework, the sentiment effect is strongest in the energy, industrial and consumer goods sectors. We conclude with a portfolio management analysis and suggest that incorporating our market sentiment indexes into portfolio construction results in an increase in the Sharpe ratio for the majority of the sectors.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net