Stress index strategy enhanced with financial news sentiment analysis for the equity markets

Recent advancements in Natural Language Processing (NLP) with Large Language Models (LLMs) have made the sentiment analysis of financial news by machines a practical achievement and no longer just a dream. More precisely, Large Language Models (LLMs) have marked a major step forward in processing large contexts, exhibiting human-level performance on various professional and academic benchmarks, although they still have limitations such as reliability issues and limited context windows [OpenAI, 2023]. Their ability to process more context has shown particularly interesting applications in many business areas [George and George, 2023]. Hence exploring the potential to extract either weak or strong signals from financial news to enhance a risk-on risk-off investment strategy becomes highly pertinent. Indeed, extracting sentiment from financial news is not new [Tetlock, 2007, Schumaker and Chen, 2009], and finance has a longstanding tradition of exploiting textual data [Kearney and Liu, 2014].