AI Application ChatGPT Beats Stock Market, Study Says

Researchers found that investing using ChatGPT analysis produced a return of more than 400% during a time period that saw the market average decline.

A study published by the University of Florida found that using ChatGPT for sentiment analysis of publicly traded companies generated investment returns far in excess of the market average.

ChatGPT, an artificial intelligence chat application developed by OpenAI, is a large language model, which is a type of artificial intelligence algorithm, though it is not one explicitly trained for financial analysis.

The study used headline data for various stocks from October 2021 through December 2022 and tracked actual stock prices for that same time period. The study omitted headlines in which companies were mentioned passively in a story about something else, daily stock movement reports and duplicate headlines. In total, the study drew on 67,586 headlines related to 4,138 companies.

During the study’s time period, the researchers found that a strategy of investing $1 in the market and buying on good news and selling on bad news (as identified by ChatGPT itself) would have turned the $1 into more than $5.50 when not accounting for transaction costs, even though the market average declined over the same time period. This strategy was repeated on a daily basis.

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When accounting for transaction costs, investing based on ChatGPT’s positive or negative evaluation outperformed the market average, provided transactions costs are 25 basis points or less per transaction.

The study also found that a strategy of only selling on bad news outperformed the inverse strategy of only buying on good news. Researcher Alejandro Lopez-Lira explained that bad news depresses stock prices more than good news inflates them, and ChatGPT was able to detect this pattern.

Additionally, companies with smaller market capitalization are more sensitive to headline sentiment than larger ones. Lopez-Lira says that, on average, a positive headline can increase the stock price of a small company’s stock by 60 bps, but the effect was only 20 bps for larger stocks.

The study did not set out to explain that gap, but Lopez-Lira suggests one explanation is that because less is known about smaller cap stocks, investors might be more sensitive to headlines than they would be for larger stocks. Lopez-Lira contends that investors can more ably balance the headline against their existing knowledge of the larger company and be less influenced by it.

Lopez-Lira explains that AI digests headline data and performs sentiment analysis much faster than a human can, so the primary advantage of using AI in trading would be the ability to act more quickly on public sentiment than a competitor relying on human expertise could.

Tags: AI, Artificial Intelligence

Rising interest rates have been a boulder on the shoulder of the stock market, joined by fears of a long-awaited recession and a federal debt-ceiling imbroglio. What will happen to equities once the Federal Reserve ends its tightening drive?

Usually nothing good, according to commentary by John Lynch, CIO of Comerica Wealth Management. Since 1980, the S&P 500 declined and bottomed out an average of 293 days after the final rate hike, with an average dip of 21.4%.

Why the market slide? Because a recession often follows the end of a rate-hike cycle, which typically was launched to tamp down inflation. Anxiety over the lead-up to that recession overshadows the cessation of tightening. Consequently, Lynch wrote, “the S&P index shows significant market weakness following the last rate hike.”

This was the case, for instance, during the time between the final increase in June 2006 and the following market low in March 2009: The index fell almost 54%, Lynch’s data show, as part of the Great Recession.

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Of course, there are times when the rate increases end, and no recession appears for a while. Example: Between August 1984 (last increase) and October 1984 (market nadir), the index slipped just 3%. A recession did not land until 1990.

At the moment, it appears that the Federal Reserve’s most recent rate boost, at its meeting May 3, may be its last. After the meeting, Chairman Jerome Powell’s remarks hinted that a pause, at least, may be at hand. The futures markets overwhelmingly believe (by 73%) the May 3 increase was the last for the year. The Fed’s next policymaking meeting is June 13-14.