Finance and Accounting Research Seminar with Guofu Zhou.

Title:   ChatGPT, Optimal  Prediction  and Optimal Portfolio Selection

Abstract: We find that good news extracted by ChatGPT from the front pages of Wall Street Journal can predict the stock market and is related to macroeconomic conditions. Consistent with existing theories, investors tend to underreact to positive news, especially during periods of economic downturns, high information uncertainty and high novelty of news. In a related problem, we propose a supervised learning  method  to find  the optimal predictive factor, which is the best linear combination of a large set of predictors. Our approach outperforms   not only both the PCA and PLS, but also all those commonly used  state of are machine learning methods. Furthermore, given a large set of factors or strategy returns, we provide   a general approach to select factors that  achieve the mean-variance efficiency, yielding the pricing kernel.