ChatGPT: Deciphering Fed Statements and Predicting Stock Market Movements
A recent study shows that OpenAI’s ChatGPT has the ability to accurately parse and decode Federal Reserve statements, similar to how humans would reason and understand them. Additionally, the chatbot was found to exhibit strong predictive capabilities in response to financial news that could impact the stock market.
Deciphering Federal Reserve Statements
Researchers at the Richmond Federal Reserve conducted a study where they tested ChatGPT-3 and GPT-4, two language models used in finance, to sort 500 sentences from Federal Reserve statements into five categories: dovish, mostly dovish, neutral, mostly hawkish, and hawkish. The AI outperformed BERT and closely aligned with the way human reviewers categorized the sentences, even without prior training.
What sets ChatGPT apart is that it was also able to provide reasonable justifications for its choices. For instance, when presented with a sentence indicating the committee’s plan to implement its balance sheet normalization program, ChatGPT-4 wrote that this was a clear signal of tightening monetary policy, assuming the economy evolves as anticipated.
Predicting Stock Market Movements
In a separate study, researchers at the University of Florida tested ChatGPT’s predictive capabilities by prompting it to provide investing recommendations based on financial headlines from after October 2021. This tested how ChatGPT would interpret news and how it would move a stock without prior knowledge of what actually happened.
Results showed a strong correlation between ChatGPT’s responses and stock market movements, with the AI providing an accurate interpretation of how headlines would impact a company’s stock.
For instance, when asked about the headline “Rimini Street Fined $630,000 in Case Against Oracle,” ChatGPT responded that investor confidence in Oracle would rise as the ruling could improve the company’s ability to protect its intellectual property.
The Potential Benefits of Incorporating LLMs into Investment Decision-Making Processes
The studies confirm the predictive power of ChatGPT’s sentiment scores and highlight the potential benefits of incorporating language models like ChatGPT into investment decision-making processes. With its ability to accurately decipher complex statements and predict how news could impact stock prices, ChatGPT could prove to be a valuable tool for investors.
