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

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.