Kirtac, K; Germano, G; (2024) Enhanced Financial Sentiment Analysis and Trading Strategy Development Using Large Language Models. In: De Clercq, O and Barriere, V and Barnes, J and Klinger, R and Sedoc, J and Tafreshi, S, (eds.) Proceedings of the 14th Workshop on Computational Approaches to Subjectivity, Sentiment, \& Social Media Analysis (WASSA 2024) at the 62nd Annual Meeting of the Association for Computational Linguistics (ACL 2024). (pp. pp. 1-10). Association for Computational Linguistics: Bangkok, Thailand.

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Abstract

This study proposes a novel methodology for enhanced financial sentiment analysis and trading strategy development using large language models (LLMs) such as OPT, BERT, FinBERT, LLAMA 3 and RoBERTa. Utilizing a dataset of 965,375 U.S. financial news articles from 2010 to 2023, our research demonstrates that the GPT-3-based OPT model significantly outperforms other models, achieving a prediction accuracy of 74.4% for stock market returns. Our findings reveal that the advanced capabilities of LLMs, particularly OPT, surpass traditional sentiment analysis methods, such as the Loughran-McDonald dictionary model, in predicting and explaining stock returns. For instance, a self-financing strategy based on OPT scores achieves a Sharpe ratio of 3.05 over our sample period, compared to a Sharpe ratio of 1.23 for the strategy based on the dictionary model. This study highlights the superior performance of LLMs in financial sentiment analysis, encouraging further research into integrating artificial intelligence and LLMs in financial markets.

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