Shrinking against sentiment: Exploiting latent asset demand in portfolio selection

Lassance, Nathan;Martin-Utrera, Alberto
(2023) Belgian Financial Research Forum — Location: Bruxelles (20.April.2023)

Files

Shrinking_Against_Sentiment__Exploiting_Latent_Asset_Demand_in_Portfolio_Selection.pdf
  • Open Access
  • Adobe PDF
  • 1.08 MB
Download

Details

Authors
  • Lassance, NathanUCLouvain
    Author
  • Martin-Utrera, AlbertoIowa State University
    Author
Abstract
We examine how sentiment-driven demand, a key component of latent asset demand, can be used to build mean-variance portfolios. We decompose these portfolios into an equally weighted component and an arbitrage component that captures the asset mispricing unexplained by the equally weighted component. Our approach shrinks mean-variance portfolios toward the equally weighted component when investor sentiment is low, i.e., shrinks against sentiment, reducing estimation risk and imposing a tighter bound on the amount of asset mispricing the arbitrage component exploits. The significant economic gains offered by our approach highlight the importance of considering latent demand in building robust investment strategies.
Affiliations

Citations

  • APA
  • Chicago
  • FWB

Lassance, N., & Martin-Utrera, A. (2023). Shrinking against sentiment: Exploiting latent asset demand in portfolio selection. Belgian Financial Research Forum, Bruxelles. https://hdl.handle.net/2078.5/103203