Artificial Intelligence Asset Pricing Models

73 Pages Posted: 9 Jan 2025 Last revised: 16 Jan 2025

See all articles by Bryan T. Kelly

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Boris Kuznetsov

Swiss Finance Institute

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Teng Andrea Xu

École Polytechnique Fédérale de Lausanne (EPFL)

Multiple version iconThere are 2 versions of this paper

Date Written: January 06, 2025

Abstract

The core statistical technology in artificial intelligence is the large-scale transformer network. We propose a new asset pricing model that implants a transformer in the stochastic discount factor. This structure leverages conditional pricing information via cross-asset information sharing and nonlinearity. We also develop a linear transformer that serves as a simplified surrogate from which we derive an intuitive decomposition of the transformer's asset pricing mechanisms. We find large reductions in pricing errors from our artificial intelligence pricing model (AIPM) relative to previous machine learning models and dissect the sources of these gains.

Suggested Citation

Kelly, Bryan T. and Kuznetsov, Boris and Malamud, Semyon and Xu, Teng Andrea, Artificial Intelligence Asset Pricing Models (January 06, 2025). Swiss Finance Institute Research Paper No. 25-08, Available at SSRN: https://ssrn.com/abstract=5089371 or http://dx.doi.org/10.2139/ssrn.5089371

Bryan T. Kelly (Contact Author)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boris Kuznetsov

Swiss Finance Institute ( email )

Semyon Malamud

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Teng Andrea Xu

École Polytechnique Fédérale de Lausanne (EPFL) ( email )

Odyssea Building, ODY 4.15, Station 5
Route Cantonale, 1015
Lausanne
Switzerland

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