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

The paper presents a transparent, auditable LLM pipeline for macro‑financial stress testing that uses structured prompting and optional retrieval of country fundamentals and news to generate G7 macroeconomic scenarios. These scenarios are mapped to portfolio losses via a three‑channel PCA factor model, with the macro‑to‑factor mapping explicitly stipulated rather than estimated. Experiments across thousands of scenarios show that severity is driven by prompt design, numerical and narrative severity are weakly linked, and different LLMs exhibit varying degrees of consistency with their own stated changes.

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• llms
• rag
• agents