Parametric portfolio policy with momentum-based sentiment trading strategy
To enhance the effectiveness of the conventional mean-variance portfolio model, this study introduces a parametric portfolio policy that incorporates a momentum-based sentiment characteristic vector. This vector enables the identification of outperforming assets by capturing both historical returns and market sentiment. Drawing on a decade of rebalancing data from the S&P 500 and Dow Jones 30 constituent stocks, the proposed model optimizes the interrelationships among portfolio holdings, a benchmark portfolio, and the constructed characteristic vectors. In contrast to conventional static back testing approaches, the proposed model accounts for transaction costs and is evaluated over a 15-year investment horizon. Empirical results demonstrate that the proposed model significantly outperforms the benchmark, particularly the minimum-variance model that does not incorporate sentiment-driven parametric adjustments. During periods of financial crisis, the model selects sentiment-based momentum more frequently, leading to differing asset allocations and potentially higher utility for investors. The sentiment-augmented momentum strategy exhibits superior performance compared to the conventional mean-variance approach. The findings underscore the importance of integrating market sentiment into characteristic vector construction, affirming the value of parametric portfolio policies in improving asset allocation and risk-adjusted returns.
Authors
- Yu‐Hsuan Lin (ORCID: https://orcid.org/0000-0001-9393-3886)
- Donald D. Lien (ORCID: https://orcid.org/0000-0002-0659-2831)
- Jing‐Rung Yu (ORCID: https://orcid.org/0000-0002-0042-4255)
- Wen‐Yi Lee (ORCID: https://orcid.org/0000-0002-3352-1967)
Institutions
- National Chi Nan University (TW)
- National Taipei University of Business (TW)
- The University of Texas at San Antonio (US)
Publication Details
- Journal
- PLoS ONE
- Published
- 2025-11-06
- DOI
- https://doi.org/10.1371/journal.pone.0335462
- Primary Topic
- Financial Markets and Investment Strategies
- Type
- article
- Field-Weighted Citation Impact
- 0.00