In recent years, there has been an explosion of new and creative ways AI can be used for pricing financial assets accurately. This is due largely to the fact that traditional methods of asset pricing are based on a number of simplifying assumptions that no longer hold true in today’s markets. For example, the assumption of efficient markets has been shown to be false in a number of studies, and the assumption of risk neutrality is no longer realistic given investors’ behavior post-2008.
As a result, a number of new AI-based approaches have been proposed in an attempt to address these shortcomings. One such approach is called “behavioral finance,” which takes into account the fact that individuals are not always rational when making investment decisions. This stream of AI research has resulted in a number of successful applications, such as automated market makers that take into account the fact that investors are often risk-averse, and sentiment analysis tools that can help predict market movements based on the collective mood of investors.
Another promising area of AI research is called “algorithmic trading,” which refers to the use of computer programs to make trading decisions. This approach has a number of advantages over traditional approaches to asset pricing, since it can take into account a much wider range of information and make decisions much faster than humans. For example, algorithmic trading systems have been used successfully to price complex derivatives, and to trade in highly volatile markets such as the cryptocurrency market.
Overall, AI-based approaches to asset pricing offer several advantages over traditional approaches. They are able to take into account a wider range of information, make decisions faster, and often provide more accurate prices. As such, AI is likely to play an increasingly important role in the world of asset pricing in the years to come.
References:
https://www.investopedia.com/terms/a/ai_artificial_intelligence.asp
https://www.investopedia.com/terms/b/behavioral-finance.asp
https://www.investopedia.com/articles/financial-theory/11/behavioral-finance-vs-traditional-finance.asp
https://www.investopedia.com/trading/algorithmic-trading-definition-and-examples/