Abstract
Financial markets respond not only to quantitative fundamentals but also to narratives that shape investor perceptions of risk, particularly during periods of heightened geopolitical uncertainty. While the low volatility factor has demonstrated robust risk adjusted performance across markets, its construction is typically static and does not account for narrative-driven fluctuations in risk.
This paper investigates whether incorporating narrative-based measures of geopolitical risk can enhance the design and resilience of low volatility equity strategies. Using firm-level geopolitical sentiment indicators derived from news flows and expert reports, we develop state-dependent specifications of the low volatility factor in which portfolio weights dynamically adjust to changes in the prevailing geopolitical narrative environment. We evaluate the performance and defensive characteristics of these narrative-conditioned strategies relative to conventional low volatility benchmarks across multiple market regimes.
Our findings provide evidence that geopolitical narratives contain incremental information relevant for factor-based portfolio construction, improving downside protection during periods of elevated uncertainty without materially compromising long-term performance. These results contribute to the growing literature on text-based measures in factor investing and offer practical insights for the design of more adaptive, risk-aware systematic investment strategies.
Authors
