Can ChatGPT Assist in Picking Stocks?

The research paper titled "Can ChatGPT Assist in Picking Stocks?" investigates whether ChatGPT-4, when enabled with internet access, can be a valuable tool for investors by providing investment advice that leads to profitable trading strategies. The study focuses on ChatGPT-4's ability to analyze financial news and data, make earnings forecasts, and rate the attractiveness of stocks for investment. Through a live experiment, the authors examine the correlation between ChatGPT-4's assessments and the actual performance of stocks, particularly around earnings announcements. The trading idea central to this paper is whether using ChatGPT-4's "attractiveness ratings" for stocks can guide investors toward making decisions that outperform the market.

Five Key Takeaways:

1. AI as an Investment Analyst: ChatGPT-4 shows promise in making accurate earnings forecasts and adjusting stock attractiveness ratings based on new information, acting much like a knowledgeable investment analyst.
2. Sensitivity to News: The AI's ability to modify its ratings in response to earnings surprises and news events underscores its potential as a real-time analysis tool for investors.
3. Profitable Strategy: Forming investment portfolios based on ChatGPT-4's attractiveness ratings could lead to above-average returns, indicating the practical value of incorporating AI into investment strategies.
4. Understanding Market Reactions: ChatGPT-4's responsiveness to news—particularly negative news—highlights its capability to process and evaluate the impact of financial events on stock performance.
5. Future Investment Tool: The findings suggest that as AI technology advances, tools like ChatGPT-4 could become integral in the investment decision-making process, offering a competitive edge to those who utilize them.

Turning AI Assessments into Profits: A Closer Look at ChatGPT's Predictive Power

This figure in the paper is pivotal as it illustrates how ChatGPT's ratings adjust in response to positive and negative earnings announcements and news events. This figure clearly shows that ChatGPT significantly downgrades the attractiveness ratings of stocks following negative earnings surprises but does not significantly upgrade ratings after positive surprises. This nuanced response to earnings news demonstrates ChatGPT's ability to discern and react to the financial implications of earnings reports, suggesting a trading idea where investors could potentially adjust their portfolios based on anticipated changes in ChatGPT's stock ratings in response to earnings announcements.

Navigating the Market with AI: The Impact of Attractiveness Ratings on Returns

This table offers a critical look at the performance of portfolios sorted according to ChatGPT's attractiveness ratings. The table reveals that portfolios deemed more attractive by ChatGPT consistently outperform less attractive ones over the subsequent month. This correlation between attractiveness ratings and future stock returns underpins a trading strategy focused on selecting stocks with higher ratings for investment. The table validates the concept that leveraging AI-generated insights can lead to a tangible advantage in the stock market, providing a clear guide for investors seeking to enhance their portfolio performance through AI-driven selection criteria.

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Pelster, Matthias, and Joel Val. "Can ChatGPT assist in picking stocks?." Finance Research Letters 59 (2024): 104786.