In this paper, we propose a new method to form momentum portfolio for improving portfolio performance. The new method relies on the ability of sentiments to predict future momentum pro…ts and prescribes to make more (less) investment with optimistic (pessimistic) sentiment. We apply the new method into real equity data and find that the new momentum strategy significantly outperforms the conventional strategy. The outperformance of the new method over the conventional one is robust to various circumstances, and we also conduct additional analyses that supplement the main results.
Keywords: Sentiment, Momentum, Market state, Portfolio performance.
JEL classification: G11, G12.
