Stress index strategy enhanced with financial news sentiment analysis
  for the equity markets
Baptiste Lefort Eric Benhamou Jean-Jacques Ohana David Saltiel Beatrice Guez Thomas Jacquot
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.