Continuous Risk Factor Models: Analyzing Asset Correlations through Energy Distance

TL;DR

This paper proposes a novel, data-agnostic framework for financial risk analysis using market news embeddings and Energy Distance to model asset correlations, offering new insights into risk management and portfolio diversification.

Contribution

It introduces a new approach that models asset distributions via news data and Energy Distance, bypassing traditional price-based methods, with implications for finance theory and practice.

Findings

Demonstrates the effectiveness of news-based asset modeling.

Links distributional differences to asset co-movements.

Provides a robust framework for risk management.

Abstract

This paper introduces a novel approach to financial risk analysis that does not rely on traditional price and market data, instead using market news to model assets as distributions over a metric space of risk factors. By representing asset returns as integrals over the scalar field of these risk factors, we derive the covariance structure between asset returns. Utilizing encoder-only language models to embed this news data, we explore the relationships between asset return distributions through the concept of Energy Distance, establishing connections between distributional differences and excess returns co-movements. This data-agnostic approach provides new insights into portfolio diversification, risk management, and the construction of hedging strategies. Our findings have significant implications for both theoretical finance and practical risk management, offering a more robust framework for modelling complex financial systems without depending on conventional market data.