Interpretable Systematic Risk around the Clock

TL;DR

This paper provides a comprehensive, real-time analysis of systematic jump risk using high-frequency data and news narratives, revealing risk heterogeneity and constructing a profitable risk-mimicking portfolio.

Contribution

It introduces a novel around-the-clock approach combining high-frequency data with LLM-classified news narratives to analyze and manage jump risk.

Findings

Macro news commands the largest risk premium.

Constructed a real-time factor-mimicking portfolio with high Sharpe ratio.

Identified significant heterogeneity in risk premia across categories.

Abstract

In this paper, I present the first comprehensive, around-the-clock analysis of systematic jump risk by combining high-frequency market data with contemporaneous news narratives identified as the underlying causes of market jumps. These narratives are retrieved and classified using a state-of-the-art open-source reasoning LLM. Decomposing market risk into interpretable jump categories reveals significant heterogeneity in risk premia, with macroeconomic news commanding the largest and most persistent premium. Leveraging this insight, I construct an annually rebalanced real-time Fama-MacBeth factor-mimicking portfolio that isolates the most strongly priced jump risk, achieving a high out-of-sample Sharpe ratio and delivering significant alphas relative to standard factor models. The results highlight the value of around-the-clock analysis and LLM-based narrative understanding for identifying and managing priced risks in real time.