arXiv AI
Aug 26

Do LLMs Understand Limit Order Book Dynamics?

A large language model trained on synthetic limit order book data can generate valid sequences of LOB events with near‑perfect accuracy, yet its internal world model does not capture the true state of the book. This shortfall results in biased estimates and misleading predictability when the model is used to forecast future LOB events. The study introduces new tests for an LLM’s world model, extending previous deterministic analyses to the stochastic dynamics inherent in limit order books.

By Junxiao Chen, Paul Glasserman