Large Language Model-Driven Small-Capitalization Trading: Integrating Financial News Sentiment, Macroeconomic Indicators, and Technical Signals
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Abstract (arXiv)
Large language models can extract richer signals from financial news than fixed sentiment lexicons, and recent work has explored feeding such signals into portfolio construction. We study an uncertainty-aware construction that feeds model-predicted risk -- decomposed into aleatoric and epistemic components -- directly into the covariance matrix of portfolio allocators, rather than treating portfolio risk as fixed or adjusting only expected returns. We evaluate the pipeline on Russell 2000 equities under three stock-selection regimes: a pure-alpha trigger that isolates abnormal stock moves not explained by macro indicators, a pure-beta trigger that captures macro-indicator moves before the stock itself fires, and a beta trigger in which both channels agree. Across the full holding-period grid, the separated pure-alpha and pure-beta legs usually dominate the beta intersection on Sharpe and return. Two horizons are especially informative. At one day, pure beta can work under low and moderate transaction costs because it captures immediate lead-lag spillovers from liquid macro and sector indicators into exposed small-cap stocks, but this advantage disappears at 100 bps when turnover and microstructure noise dominate. At 40 days, pure beta works for a different reason: slower macro repricing overtakes the firm-specific pure-alpha channel. The strongest conservative row is pure beta with GPT-4o mini sentiment, a Student-t target, a 40-day holding period, and risk parity allocation, reaching Sharpe 2.33 at 100 bps. The results suggest that stock-selection regime and allocator choice matter at least as much as the sentiment model, and that separating firm-specific and macro-exposure triggers is more informative than requiring both to fire simultaneously.
Key facts. No citing papers in the map yet (data through 14 Oct 2026). Builds on 6 of its 29 references that are in the map. First posted on arXiv 12 Aug 2026.
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References · 6
- 2023Llama 2: Open Foundation and Fine-Tuned Chat Modelscited by 13,028
- 2019FinBERT: Financial Sentiment Analysis with Pre-trained Language Modelscited by 385
- 2023Assessing Look-Ahead Bias in Stock Return Predictions Generated By GPT Sentiment Analysiscited by 31
- 2025LLM-Enhanced Black-Litterman Portfolio Optimizationcited by 7
- 2026Adversarial News and Lost Profits: Manipulating Headlines in LLM-Driven Algorithmic Tradingcited by 4
- 2025Sentiment-Aware Mean-Variance Portfolio Optimization for Cryptocurrenciescited by 1
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