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Can LLM-based Financial Investing Strategies Outperform the Market in Long Run?

Created by
  • Haebom

Author

Weixian Waylon Li, Hyeonjun Kim, Mihai Cucuringu, Tiejun Ma

Outline

This paper critically evaluates the generalizability and robustness of asset pricing and stock trading strategies using large-scale language models (LLMs). We point out that previous studies have overestimated the effectiveness of LLM strategies due to their narrow time horizons and limited stock portfolios. We propose a backtesting framework, FINSABER, to evaluate LLM-based market timing strategies over a long period of time (over 20 years) and over 100 stocks.

Takeaways, Limitations

Takeaways: The superiority of LLM reported in previous studies significantly deteriorates when evaluating long-term and broad-based stocks. LLM strategies tend to be conservative in bull markets and aggressive in bear markets, suggesting low returns and potentially large losses. Therefore, this highlights the need to develop LLM strategies that prioritize trend detection and market-dependent risk management over simply increasing framework complexity.
Limitations: Backtesting results using the FINSABER framework may be limited to a specific period and set of securities. Additional research is required for various market conditions and investment strategies.
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