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

44 Pages Posted: 15 Apr 2024 Last revised: 27 Apr 2024

See all articles by Baptiste Lefort

Baptiste Lefort

University of Paris-Saclay - CentraleSupélec; AI For Alpha

Eric Benhamou

Université Paris Dauphine; AI For Alpha; EB AI Advisory; Université Paris-Dauphine, PSL Research University

Jean-Jacques Ohana

AI For Alpha

David Saltiel

Université Paris Dauphine; A.I. Square Connect; AI For Alpha

Beatrice Guez

AI For Alpha

Thomas Jacquot

AI For Alpha

Date Written: April 2, 2024

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 generalises across equities markets.

Keywords: Market stress, Volatility, News sentiment, Investment strategy

JEL Classification: G14, D81, C55, G17

Suggested Citation

Lefort, Baptiste and Benhamou, Eric and Ohana, Jean-Jacques and Saltiel, David and Guez, Beatrice and Jacquot, Thomas, Mixing Financial Stress with GPT-4 News Sentiment Analysis for Optimal Risk-On/Risk-Off Decisions (April 2, 2024). Available at SSRN: https://ssrn.com/abstract=4781752 or http://dx.doi.org/10.2139/ssrn.4781752

Baptiste Lefort

University of Paris-Saclay - CentraleSupélec ( email )

Moulon Plateau 3 Joliot Curie Street
Gif-sur-Yvette, 91190
France

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

Eric Benhamou (Contact Author)

Université Paris Dauphine ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

EB AI Advisory ( email )

35 Boulevard d'Inkermann
Neuilly sur Seine, 92200
France

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Jean-Jacques Ohana

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

David Saltiel

Université Paris Dauphine ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

A.I. Square Connect ( email )

35 Boulevard d'Inkermann
Neuilly sur Seine, 92200
France

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

Beatrice Guez

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

Thomas Jacquot

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

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