AI and Financial Fragility: A Framework for Measuring Systemic Risk in Deployment of Generative AI for Stock Price Predictions

Miranda McClellan ()
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Miranda McClellan: Schwarzman College, Tsinghua University, Beijing 100084, China

JRFM, 2025, vol. 18, issue 9, 1-40

Abstract: In a few years, most investment firms will deploy Generative AI (GenAI) and large language models (LLMs) for reduced-cost stock trading decisions. If GenAI-run investment decisions from most firms are heavily coordinated, they could all give a “sell” signal simultaneously, triggering market crashes. Likewise, simultaneous “buy” signals from GenAI-run investment decisions could cause market bubbles with algorithmically inflated prices. In this way, coordinated actions from LLMs introduce systemic risk into the global financial system. Existing risk analysis for GenAI focuses on endogenous risk from model performance. In comparison, exogenous risk from external factors like macroeconomic changes, natural disasters, or sudden regulatory changes, is understudied. This research fills the gap by creating a framework for measuring exogenous (systemic) risk from LLMs acting in the stock trading system. This research develops a concrete, quantitative framework to understand the systemic risk brought by using GenAI in stock investment by measuring the covariance between LLM stock price predictions across three industries (technology, automobiles, and communications) produced by eight large language models developed across the United States, Europe, and China. This paper also identifies potential data-driven technical, cultural, and regulatory mechanisms for governing AI to prevent negative financial and societal consequences.

Keywords: artificial intelligence; large language models; systemic risk; stock investment; machine learning; market conditions; policy; geopolitical risk (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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