Predicting with AI?
3 min readResearchers from the University of Florida have in one study examines how reliably ChatGPT can predict stock market trends. In the tests, an artificial intelligence achieved a return of over 500 percent. With this, the AI outperforms all competing products, including the tools used by hedge funds. Is ChatGPT now also shaking up the crypto market?
Effective language analysis?
The study evaluates the performance of ChatGPT in sentiment analysis. The scientists wanted to know how well the AI can estimate price developments based on news and stock market data. The chatbot received a data set consisting of stock-related messages from October 2021 to December 2022. A total of 67,586 news articles on 4,138 individual companies.
“We use ChatGPT to indicate whether a particular post is good, bad, or irrelevant news for company stock prices,” the researchers said. They then calculate a numerical score and document the correlation between these “ChatGPT scores” and the resulting daily stock market returns. The AI consistently performed better than any other speech analysis tool on the market.
How useful is AI trading?
“Our results suggest that incorporating advanced language models into the investment decision-making process can lead to more accurate predictions and improve the performance of quantitative trading strategies,” the study said.
Although ChatGPT outperformed other tools, such as GPT-1, GPT-2, BERT, or traditional methods of sentiment analysis in the study, the data also shows that not every AI investment strategy was successful. Only the “long-short strategy” and the “short-only strategy” yielded high profits.
The “long-short” strategy involves buying companies with good news and shorting companies with bad news. With the “short-only strategy”, only companies with bad news are sold short. The “long-only strategy,” which buys only companies with good news, returned about 50 percent. Other strategies, however, led to loss.
Significance for the crypto market
The study shows that ChatGPT is basically able to evaluate messages according to whether they are a positive, negative or neutral signal. The ability to process natural language increases the analysis capability of the language tool enormously. In this way, large amounts of data can be examined quickly. There are correlations between the investment strategies derived from this and the development of the stock market. However, firstly, this is no guarantee for the future and secondly, not all investment strategies were successful in the trials. Only half made any profits at all.
As for the crypto market, language analysis transfers easily. Whether the news concerns stock or crypto companies is irrelevant to the AI. In the future, ChatGPT and Co. can therefore help with purchasing decisions in the crypto space. However, it is unlikely that traders will rely completely on the advice of artificial intelligence on a large scale. Because prices are determined by supply and demand. An inflationary use of buy and sell recommendations by artificial intelligence will sooner or later be priced in by the market. More likely, traders will incorporate AI speech analysis into their investment strategies as one tool among many.
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