New Research Claims ChatGPT is Able to Predict Stock Price Movements

New Research Claims ChatGPT is Able to Predict Stock Price Movements

by May 8, 2023

ChatGPT, an artificial intelligence (AI) chatbot developed by OpenAI, is capable of accurately predicting stock price movements, showcasing that large language models (LLMs) can be powerful tools for forecasting stock prices, researchers at the University of Florida said in a new paper.

These conclusions were drawn from a study that sought to determine whether or not ChatGPT could be used to predict market movements. For the study, the researchers looked at over 50,000 headlines from a data vendor about public stocks on the New York Stock Exchange, Nasdaq and a small-cap exchange. They then fed the headlines into ChatGPT for analysis and classification. A sentiment score was then generated and compared with the corresponding stock market returns.

An analysis of these results showed a strong correlation between the ChatGPT evaluation and the subsequent daily returns of the stocks in the sample, revealing that the AI chatbot was able to correctly predict stock market movements based on sentiment analytics.

The researchers, whom also compared the performance of ChatGPT with traditional sentiment analysis methods provided by a data vendor, found that the ChatGPT model actually outperformed existing methods.

This superiority, the researchers said, can be attributed to the chatbot’s advanced language understanding capabilities, which allow it to capture the nuances and subtleties within news headlines. This enables the model to generate more reliable sentiment scores, leading to better predictions of daily stock market returns, they said.

According to the researchers, these findings suggest that ChatGPT and LLMs in general could enhance investment decision-making by yielding more accurate predictions, improving the performance of quantitative trading strategies, and providing a better understanding of market dynamics.

Since its released in November 2022, ChatGPT has sent social media, schools and the business world abuzz for its ability to engage in human-like conversations, its versatility and its intelligence.

Just this week, an experiment conducted by financial comparison site Finder.com revealed that ChatGPT is able to pick stocks better than leading UK funds.

A basket of 38 stocks selected by the AI chatbot outperformed the top ten most popular funds in the country, gaining 4.9% between March 06 and April 28 against an average loss of 0.8% for the funds.

Major funds and banks have leveraged AI to support their investment decisions for years, but ChatGPT has now put the technology in the hands of the general public.

Finder.com conducted a survey of 2,000 UK adults in April 2023 and found that only a mere percentage of the respondents (8%) had used ChatGPT for financial advice. That number, however, is expected to grow in the future, since 19% of the consumer polled said they would consider using the AI chatbot for financial advice.

AI is currently being applied in various aspects of stock trading. One way the technology is being used is through the analysis of large amounts of data, including news articles, financial reports, social media posts, and market trends, to identify patterns and correlations.

Another application of AI in stock trading is through the use of predictive models that forecast future market trends based on historical data, helping traders anticipate changes in stock prices and adjust their trading strategies accordingly.

Asset management firm BlackRock, for example, uses AI algorithms to analyze market trends and make better investment decisions; hedge fund Bridgewater Associates is known for its extensive use of AI algorithms in its trading strategies; and JPMorgan Chase has developed an AI-powered trading platform called LOXM that uses machine learning (ML) algorithms to execute trades more efficiently.

According to Goldman Sachs, generative AI systems that are capable of producing content like ChatGPT could drive a 7% (or almost US$7 trillion) increase in global gross domestic product and lift productivity growth by 1.5 percentage points over a 10-year period.

At the same time, advances in AI are expected to have a significant impact on the labor market, exposing the equivalent of 300 million full-time workers across big economies to automation.

 

Featured image credit: Edited from freepik