Fatal Attraction? An Early Investigation of the AI Bubble
Abstract
The equity market has rewarded AI-relevant firms with outsized growth and elevated valuations. However, if AI fails to deliver the expected earnings growth and cost savings, today’s financial and physical investments may be misallocated. To assess whether the equity market is currently experiencing an AI bubble, we construct a firm-level AI Rank Score using asset embeddings. Asset pricing tests show that firms with high AI Rank Scores have higher expected returns, higher valuation ratios, and are more profitable. Institutional investors, hedge funds in particular, hold portfolios with high delta exposure and position tilts toward the AI stocks. While we cannot rule out the AI-bubble hypothesis, the market is presently not as detached from fundamentals as a bubble would imply.
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Yiyang Zhang
Ph.D. Candidate in Finance
My research interests include Option Market, Asset Pricing, Institutional Investors, Behavioral Finance, and Artificial Intelligence.