Tactical Asset Allocation Using Investors’ Sentiment

We extend investor sentiment literature and apply it to tactical portfolio allocation in the Korean stock market. We first construct a Korean investors' sentiment index by considering prior literature and expert opinions. Second, we investigate whether the index can predict both time series and cross sectional variations of stock returns. Third, we attempt tactical asset allocation using the index. Our findings correspond to prior literature. Our sentiment index predicts both time series and cross sectional variations of stock returns. In addition, the tactical asset allocation generates significant excess return after adjusting risks and transaction costs. Such results are useful not only to academic researchers, but also practitioners such as active fund managers, risk managers and traders