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Benefiting from the frightened herd: Dynamic asset allocation amid panic sentiment

Author

Listed:
  • Wu, Fenglin
  • Shi, Yongdong
  • Xiong, Xiong
  • Li, Yanshuang
  • Dong, Zibing

Abstract

This paper introduces an innovative dynamic asset allocation approach to hedge against panic sentiment and demonstrates that adopting such an anti-panic strategy can be beneficial. We first develop a novel measure of panic sentiment and analyze its spillover effects across major stock markets. The strategy’s diversification advantages in mitigating panic sentiment are then evaluated. Backtesting results reveal substantial long-term excess returns over benchmarks, with risk-adjusted metrics and statistical tests confirming the robustness of these results.

Suggested Citation

  • Wu, Fenglin & Shi, Yongdong & Xiong, Xiong & Li, Yanshuang & Dong, Zibing, 2024. "Benefiting from the frightened herd: Dynamic asset allocation amid panic sentiment," Economics Letters, Elsevier, vol. 245(C).
    • Handle: RePEc:eee:ecolet:v:245:y:2024:i:c:s0165176524005366
    DOI: 10.1016/j.econlet.2024.112052
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