A0588
Title: Shrinking against sentiment: Exploiting latent asset demand in portfolio selection
Authors: Nathan Lassance - UCLouvain (Belgium) [presenting]
Alberto Martin-Utrera - Iowa State University (United States)
Abstract: Sentiment-driven demand is examined, a key component of latent asset demand, and can be used to build mean-variance portfolios. These portfolios are decomposed into an equally weighted component and an arbitrage component that captures the asset mispricing unexplained by the equally weighted component. The 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 the approach highlight the importance of considering latent demand in building robust investment strategies.
