While ChatGPT Isn’t a Crystal Ball That Can See Into the Future, it Has the Potential to Become a Valuable Tool For Investors Looking to Forecast Stock Price Movements
According to a new study conducted by two University of Florida finance professors, ChatGPT outperformed the traditional models in predicting how stocks will react to news headlines.
On Monday, two finance professors from the University of Florida published a research paper in Social Science Research Network. The title of the research paper is “Can ChatGPT Forecast Stock Price Movements? Return Predictability and Large Language Models.”
In the study, the two researchers supplied ChatGPT with more than 50,000 different news headlines dating back to October 2021 and asked the AI chatbot if the headlines were good, bad, or irrelevant as they related to each company’s stock price.
The sentiment analysis supplied by ChatGPT was then used to generate a ChatGPT score, which the researchers analyzed to see if the ChatGPT scores accurately predicted the company’s stock price the following trading day.
The researchers described what they uncovered as a “statistically significant positive correlation” between the ChatGPT scores and the performance of the stock the following day. The companies with higher ChatGPT scores more often experienced better stock price performance than those with lower ChatGPT scores. The research study also saw that ChatGPT outperformed other “traditional sentiment analysis methods” that also use news headlines and social media to predict the movement of stock prices.
Source: Yahoo Finance YouTube
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The researchers advised investors not to rely solely on ChatGPT when making investment decisions.
Commenting on the study’s results, the researchers wrote:
“In short, our study demonstrates the value of ChatGPT in predicting stock market returns. Our results suggest that incorporating advanced language models into the investment decision-making process can yield more accurate predictions and enhance the performance of quantitative trading strategies.”
The researchers added:
“Our analysis reveals that ChatGPT sentiment scores exhibit a statistically significant predictive power on daily stock market returns. By utilizing news headline data and the generated sentiment scores, we find a strong correlation between the ChatGPT evaluation and the subsequent daily returns of the stocks in our sample. This result highlights the potential of ChatGPT as a valuable tool for predicting stock market movements based on sentiment analysis.”
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