What Does ChatGPT Make of Historical Stock Returns? Extrapolation and Miscalibration in LLM Stock Return Forecasts

54 Pages Posted: 23 Sep 2024

See all articles by Shuaiyu Chen

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business

T. Clifton Green

Emory University - Department of Finance

Huseyin Gulen

Mitchell E. Daniels, Jr School of Business, Purdue University; Purdue University - Krannert School of Management

Dexin Zhou

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: August 30, 2024

Abstract

We examine how large language models (LLMs) interpret historical stock returns and compare their forecasts with estimates from a crowd-sourced platform for ranking stocks. While stock returns exhibit short-term reversals, LLM forecasts over-extrapolate, placing excessive weight on recent performance similar to humans. LLM forecasts appear optimistic relative to historical and future realized returns. When prompted for 80% confidence interval predictions, LLM responses are better calibrated than survey evidence but are pessimistic about outliers, leading to skewed forecast distributions. The findings suggest LLMs manifest common behavioral biases when forecasting expected returns but are better at gauging risks than humans.

Keywords: Large language models, Generative AI, Return forecasts, Extrapolative expectations

JEL Classification: D84, G17, G40, O33

Suggested Citation

Chen, Shuaiyu and Green, T. Clifton and Gulen, Huseyin and Zhou, Dexin, What Does ChatGPT Make of Historical Stock Returns? Extrapolation and Miscalibration in LLM Stock Return Forecasts (August 30, 2024). Available at SSRN: https://ssrn.com/abstract=4941906 or http://dx.doi.org/10.2139/ssrn.4941906

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
5853198838 (Phone)
47906-1744 (Fax)

T. Clifton Green (Contact Author)

Emory University - Department of Finance ( email )

1300 Clifton Rd.
Atlanta, GA 30322-2710
United States
404-727-5167 (Phone)
404-727-5238 (Fax)

Huseyin Gulen

Mitchell E. Daniels, Jr School of Business, Purdue University ( email )

403 Mitch Daniels Blvd.
West Lafayette, IN 47907
United States

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Dexin Zhou

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

55 Lexington Avenue
New York, NY 10010
United States

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