ChatGPT AI is gaining momentum in education, business, literary efforts and now investment management! The overall strengths and impact of what ChatGPT can accomplish have not yet been fully unleashed. But we do know a few things for certain. ChatGPT has the ability to analyze copious amounts of data. ChatGPT has not convinced all naysayers that more- data is better. But, believe it or not, ChatGPT may be a better stock-picker than your Financial Advisor, your brother-in-law and perhaps, ChatGPT may be a better stock-picker than the monkey with the darts and the Wall Street Journal we used to hear about every January 1st!
It is confirmed through the academic research published April 6, 2023 by Alejandro Lopez-Lira and Yuehua Tang both of the Finance Department at University of Florida. The study supports that using ChatGPT for sentiment analysis of publicly traded companies produced investment returns in excess of the market average. ChatGPT, is an artificial intelligence chat application that has been developed by OpenAI.
The study incorporated headline data for a variety of equities from October 2021 through December 2022. The researchers tracked actual stock prices for that same time period. It is worth noting that the study did omit headlines in which companies were mentioned passively in a story about something else. In total, the study drew on 67,586 headlines related to 4,138 companies.
During the course of the study, the researchers identified that a strategy of investing $1 in the market and buying on good news; and, conversely selling on bad news (as identified by ChatGPT) and displayed as headlines. Also $1 would have grown to 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 each day.
Companies with smaller market capitalization appear more sensitive to headline sentiment than larger ones.