Can ChatGPT Forecast Stock Price Movements? Return Predictability and Large Language Models

We examine the potential of ChatGPT, a large language model, 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. 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.