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Abstract
In this article, the authors show that it is possible to enhance traditional Black and Litterman strategic asset allocation (SAA) models with a behavioral approach based on news sentiment. In an out-of-sample backtest over 10 years, the news sentiment–based SAA outperforms the benchmark SAA by 0.5% a year with less risk and a 20% higher Sharpe ratio. The news sentiment data are also statistically different from price momentum measures.
Key Findings
▪ The authors enhance traditional Black and Litterman strategic asset allocation (SAA) models with a behavioral approach based on news sentiment.
▪ Sharpe ratios of such portfolios are enhanced by up to 20% compared with more traditional SAAs.
▪ The authors demonstrate that news sentiment is statistically different from price momentum measures.
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600