Applying News Sentiment for Optimizing Strategic Asset Allocations

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.