Data & Research May 23, 2023

ChatGPT Sentiment Analysis Significantly Outperforms Stock Market Average

University of Florida researchers found that using ChatGPT to analyze stocks outperformed the market average.

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A study published by the University of Florida found that using ChatGPT for sentiment analysis of publicly traded companies generated investment returns far in excess of the market average.

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ChatGPT, an artificial intelligence chat application developed by OpenAI, is a large language model, which is a type of artificial intelligence algorithm, though it is not one explicitly trained for financial analysis.

The study used headline data for various stocks from October 2021 through December 2022 and tracked actual stock prices for that same time period. The study omitted headlines in which companies were mentioned passively in a story about something else, daily stock movement reports and duplicate headlines. In total, the study drew on 67,586 headlines related to 4,138 companies.

During the study’s time period, the researchers found that a strategy of investing $1 in the market and buying on good news and selling on bad news (as identified by ChatGPT itself) would have turned the $1 into more than $5.50 when not accounting for transaction costs, even though the market average declined over the same time period. This strategy was repeated on a daily basis.

When accounting for transaction costs, investing based on ChatGPT’s positive or negative evaluation outperformed the market average, provided transactions costs are 25 basis points or less per transaction.

The study also found that a strategy of only selling on bad news outperformed the inverse strategy of only buying on good news. Researcher Alejandro Lopez-Lira explained that bad news depresses stock prices more than good news inflates them, and ChatGPT was able to detect this pattern.

Additionally, companies with smaller market capitalization are more sensitive to headline sentiment than larger ones. Lopez-Lira says that, on average, a positive headline can increase the stock price of a small company’s stock by 60 bps, but the effect was only 20 bps for larger stocks.

The study did not set out to explain that gap, but Lopez-Lira suggests one explanation is that because less is known about smaller cap stocks, investors might be more sensitive to headlines than they would be for larger stocks. Lopez-Lira contends that investors can more ably balance the headline against their existing knowledge of the larger company and be less influenced by it.

Lopez-Lira explains that AI digests headline data and performs sentiment analysis much faster than a human can, so the primary advantage of using AI in trading would be the ability to act more quickly on public sentiment than a competitor relying on human expertise could.

In Practice May 23, 2023

CFP Board Outlines Best Practices to Retain Diverse Talent

A report on ‘creating DEI-driven culture’ encourages firms to articulate a vision, ensure equitable hiring and offer leadership development.

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Now that many have recruited diverse talent, financial firms should prioritize retaining those workers by implementing strategic tactics to create a culture of retention, according to new research and guidance from the Certified Financial Planner Board Center for Financial Planning.

The CFP Board’s report, “Creating a DEI-Driven Culture of Retention in Financial Planning,” found that the financial planning profession has made meaningful inroads in attracting younger, more diverse talent, but it should also aim to foster a culture of retention. Tactics should include areas such as articulating a vision, ensuring equitable hiring, offering leadership development and clearly defining career paths, among other initiatives.

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“While it is essential that firms continue to seek diverse, qualified talent, it is equally important for them to implement strong retention strategies that will sustain the profession’s growing diversity in the long term,” the CFP Board reported. “This is particularly true in the post-pandemic era, as employees seek closer alignment between their values and those of a prospective employer, in addition to greater flexibility, compensation and employer-provided benefits.”

In order to retain talent, the CFP Board suggested that senior leaders articulate their vision, explaining the “why” behind certain organizational efforts. They should also develop an equity lens, a process to assess how a policy might impact underrepresented groups.

Hire Right

Firms should also ensure equitable hiring by creating clear job postings and expanding recruiting networks, according to the report. Hiring processes that employ a diverse panel of interviewers and set skills-based, consistent rubrics for evaluating candidates will create better diversity among new hires.

Building positive relationships between management and staff is vital for retention, according to the CFP Board report. Firms must ensure management is trained in inclusive leadership skills and cultural competencies that will help managers cultivate trust with their employees.

Providing a transparent career map should lead to equitable opportunities for advancement, as employees will better understand how to grow within their firm. Clearly defined career paths can also support succession planning and development of future, diverse leadership.

Career Development

The report continued to outline how important professional development is to a financial planner’s career path. In addition to more traditional learning opportunities, mentorship, fellowship and sponsorship programs can offer strong support systems and more personalized advice for young professionals.

Measurement of retention-focused metrics can help firms track their progress toward diversity and identify areas that could use improvement, according to the report. These metrics should be paired with an accountability system, which will connect equity goals to decisions on bonuses and promotions.

“A culture of retention emphasizes integration. It promotes continuous learning, curiosity, and creative thinking among all employees,” the report stated. “It must be embedded throughout an organization—from the recruitment and onboarding process to mentorship and professional development programs—and supported by a system of accountability. And while managers, supervisors and company executives are responsible for building and maintaining a culture of retention, employees must have mechanisms for providing feedback and other input that help to strengthen that culture.”

Earlier this year, the CFP Board restructured in part to further its work advancing diversity, equity and inclusion in the financial space. The Washington, D.C.-based nonprofit split itself into two entities, one focused on its core work of financial certification and the other focused on expanding CFPs’ professional diversity for the “benefit of the public.”

The retention strategies and best practices presented in the CFP Board report were compiled from independent research, a review of existing literature on the subject and case studies provided by financial services firms.

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