Harnessing artificial intelligence for monitoring financial markets

Matteo Aquilina, Douglas Kiarelly Godoy de Araujo, Gaston Gelos, Taejin Park and Fernando Perez-Cruz

No 1291, BIS Working Papers from Bank for International Settlements

Abstract: Predicting financial market stress has long proven to be a largely elusive goal. Advances in artificial intelligence and machine learning offer new possibilities to tackle this problem, given their ability to handle large datasets and unearth hidden nonlinear patterns. In this paper, we develop a new approach based on a combination of a recurrent neural network (RNN) and a large language model. Focusing on deviations from triangular arbitrage parity (TAP) in the Euro-Yen currency pair, our RNN produces interpretable daily forecasts of market dysfunction 60 business days ahead. To address the "black box" limitations of RNNs, our model assigns data-driven, time-varying weights to the input variables, making its decision process transparent. These weights serve a dual purpose. First, their evolution in and of itself provides early signals of latent changes in market dynamics. Second, when the network forecasts a higher probability of market dysfunction, these variable-specific weights help identify relevant market variables that we use to prompt an LLM to search for relevant information about potential market stress drivers.

Keywords: market dysfunction; liquidity; arbitrage; artificial intelligence; financial stability (search for similar items in EconPapers)
JEL-codes: G14 G15 G17 (search for similar items in EconPapers)
Date: 2025-09
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