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Can ChatGPT predict Chinese equity premiums?

Author

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  • Ma, Feng
  • Lyu, Zhichong
  • Li, Haibo

Abstract

Leveraging over 1.86 million news headlines, we examine the capability of ChatGPT-3.5, a large language model (LLM), to predict equity risk premiums in the Chinese market. The predictive scores from ChatGPT not only positively and significantly forecast equity premiums but also markedly outperform the bag-of-words (BoW) method, demonstrating its superior capability to discern intricate market sentiments from extensive datasets. The consistent and reliable performance in both in-sample and out-of-sample tests underscores the effectiveness of ChatGPT and its potential to revolutionize financial forecasting. This study highlights the substantial value and innovative contribution of LLMs, such as ChatGPT, in enriching the precision and depth of financial market analysis.

Suggested Citation

  • Ma, Feng & Lyu, Zhichong & Li, Haibo, 2024. "Can ChatGPT predict Chinese equity premiums?," Finance Research Letters, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324006615
    DOI: 10.1016/j.frl.2024.105631
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    More about this item

    Keywords

    Large language model; ChatGPT; Chinese equity premium; Bag-of-words;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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