Stress index strategy enhanced with financial news sentiment analysis for the equity markets
This provides an incremental improvement in risk-on risk-off strategies for equity market investors by integrating AI-driven sentiment analysis.
The paper tackled stock market risk prediction by combining a financial stress indicator with GPT-4 sentiment analysis of Bloomberg news, resulting in improved performance with higher Sharpe ratios and reduced maximum drawdowns across major equity markets like NASDAQ and S&P 500.
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 GPT-4. 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 generalises across equities markets.