Hedging financial turbulence risk with textual analysis

Qingfu Liu

doi:10.1016/j.pacfin.2026.103062

Hedging financial turbulence risk with textual analysis

2026-01-12

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AI

Q

Qingfu Liu

Y

Yiuman Tse *

C

Chuanjie Wang

J

Jiaer Yang

DOI：10.1016/j.pacfin.2026.103062

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Abstract

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• Using over 3.6 million news articles, we create a Chinese Financial Turbulence Index (FTI) to measure financial market turbulence. • FTI is influenced by market uncertainty and macro variables, and it negatively predicts market returns. • To hedge financial turbulence risk, we employ scaled PCA and a portfolio-mimicking approach. • Our hedging stock portfolio leverages 179 firm characteristics across five firm dimensions. • Combined with non-stock assets, the portfolio effectively mitigates turbulence risk.

Hedging financial turbulence risk with textual analysis

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