Journal of Risk

The impact of economic sentiment on financial portfolios during the recent turmoil

Thibault Bougerol and Julien Fouquau

  • The authors construct 13 individual investor sentiment measures based on Twitter data.
  • Investor sentiment has predictive power over the US sectoral returns.
  • Incorporating our sentiment into portfolio construction results in Sharpe ratio improvement.

This paper aims to assess the influence of economic sentiment on financial portfolios during the recent period of the Covid-19 pandemic and the Russia–Ukraine crisis. We follow a dictionary-based approach to compute sentiment indexes related to 13 US portfolios. Financial sentiment is extracted from a data set of 4 974 000 tweets covering the period from October 4, 2019 to March 23, 2022. For these 13 indexes, we compute their level and variation to capture the new information and we propose three empirical exercises. Using contemporaneous regressions, our results show that the impact is relatively pronounced for 11 out of the 13 portfolios. The unresponsive portfolios are those based on the utilities and consumer staples sectors. Transforming our indexes into first differences allows us to obtain predictive power. In this framework, the sentiment effect is strongest in the energy, industrial and consumer goods sectors. We conclude with a portfolio management analysis and suggest that incorporating our market sentiment indexes into portfolio construction results in an increase in the Sharpe ratio for the majority of the sectors.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here