Can ChatGPT Forecast Stock Price Movements? Return Predictability and Large Language Models
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We examine the potential of ChatGPT, and other large language models, in predicting stock market returns using sentiment analysis of news headlines. We use ChatGPT to indicate whether a given headline is good, bad, or irrelevant news for firms' stock prices. We then compute a numerical score and document a positive correlation between these ChatGPT scores and subsequent daily stock market returns. Further, ChatGPT outperforms traditional sentiment analysis methods. We find that more basic models such as GPT-1, GPT-2, and BERT cannot accurately forecast returns, indicating return predictability is an emerging capacity of complex models. 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.
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