Mixing Financial Stress with GPT-4 News Sentiment Analysis for Optimal Risk-On/Risk-Off Decisions

Combinaison du stress financier et de l'analyse du sentiment d'actualité GPT-4 pour des décisions optimales en matière de prise de risque et de refus de prendre des risques

Baptiste Lefort, Eric Benhamou, Jean-Jacques Ohana, David Saltiel, Beatrice Guez and Thomas Jacquot
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Baptiste Lefort: MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay, A.I. For Alpha
Eric Benhamou: A.I. For Alpha, Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres
Jean-Jacques Ohana: A.I. For Alpha
David Saltiel: A.I. For Alpha
Beatrice Guez: A.I. For Alpha
Thomas Jacquot: A.I. For Alpha

Working Papers from HAL

Abstract: This paper introduces a new risk-on risk-off strategy for the stock market, which combines a financial stress indicator with a sentiment analysis done by ChatGPT reading and interpreting Bloomberg daily market summaries. Forecasts of market stress derived from volatility and credit spreads are enhanced when combined with the financial news sentiment derived from GPT4. As a result, the strategy shows improved performance, evidenced by higher Sharpe ratio and reduced maximum drawdowns. The improved performance is consistent across the NASDAQ, the S&P 500 and the six major equity markets, indicating that the method generalizes across equities markets.

Keywords: Market stress; Volatility; News sentiment; Investment strategy (search for similar items in EconPapers)
Date: 2024-10-16
Note: View the original document on HAL open archive server: https://hal.science/hal-04739936v1
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