Enhanced financial sentiment analysis and trading strategy development using large language models

Kirtac, Kemal and Germano, Guido (2024) Enhanced financial sentiment analysis and trading strategy development using large language models. In: De Clercq, Orphée, Barriere, Valentin, Barnes, Jeremy, Klinger, Roman, Sedoc, João and Tafreshi, Shabnam, (eds.) Proceedings of the 14th Workshop on Computational Approaches to Subjectivity, Sentiment, & Social Media Analysis. Association for Computational Linguistics, Bangkok, Thailand, pp. 1-10. ISBN 979-8-89176-156-8

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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, LLAMA3andRoBERTa. 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.

Item Type:	Book Section
Additional Information:	© 2025 The Author(s)
Divisions:	Management LSE
Subjects:	Q Science > QA Mathematics > QA75 Electronic computers. Computer science H Social Sciences > HG Finance H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Date Deposited:	21 Jul 2025 09:39
Last Modified:	21 Jul 2025 09:39
URI:	http://eprints.lse.ac.uk/id/eprint/128664

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