LLM-Generated Counterfactual Stress Scenarios for Portfolio Risk Simulation via Hybrid Prompt-RAG Pipeline

Masoud Soleimani

Papers from arXiv.org

Abstract: We develop a transparent, auditable large language model (LLM) pipeline for macro-financial stress testing. Structured prompting, with optional retrieval of country fundamentals and news, emits G7 macroeconomic scenarios (GDP growth, inflation, policy rate), which are converted into deviations from an IMF World Economic Outlook baseline and translated into portfolio losses through a three-channel PCA factor model. The macro-to-factor mapping is stipulated rather than estimated, so every tail-risk multiple is conditional on stated assumptions. Across 2,420 accepted scenarios from two model families and three runs, plus an unanchored-severity run and eight risk-layer ablations, we find three things. First, severity is inherited from scenario design, not generated by the model: prompt variant dominates every variance decomposition, removing the prompted severity bands makes GPT-5.6-luna's recession 1.6 pp milder, apparent country heterogeneity largely reflects the institutional baseline, and retrieval and news matter only where the prompt leaves magnitude free. Second, numerical severity and narrative severity are only weakly coupled. Third, GPT-5.6-luna follows its own arithmetic but anchors on prompted bands, whereas Llama-3.1-8B is four to seven times more dispersed and contradicts its own stated changes in 90% of cases. A repeat run differs at the scenario level yet agrees on aggregate multiples to within 0.007 times. LLM scenario generators are best used for narrative and sector elicitation around a prescribed severity path, not as autonomous calibrators of stress magnitude.

Date: 2025-11, Revised 2026-10
New Economics Papers: this item is included in nep-cmp, nep-inv and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2512.07867 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2512.07867

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().