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Can Large Language Models forecast carbon price movements? Evidence from Chinese carbon markets

Author

Listed:
  • Chen, Rui
  • Jiang, Haiqi
  • Guo, Tingyu
  • Fan, Chenyou

Abstract

This paper investigates the impact of Large Language Models (LLMs) on forecasting Chinese carbon prices. We introduce a novel two-stage forecasting framework integrating a Time-Series Model (TSM) and Large Language Models. Initially, we use historical data on Chinese Emission Allowance prices to train the TSM for preliminary predictions. LLMs then refine these predictions, which process a sequence of past and corresponding future prices as a chain of thought. Additionally, we utilize the LLM to analyze and categorize the sentiment of news headlines, generating market sentiment labels that enhance the LLM’s predictive accuracy. Our findings indicate that LLMs can improve TSM forecasts by 28–38 % across different regional markets. Furthermore, incorporating news sentiment labels into the LLM contributes an additional reduction in forecasting deviations, ranging from 3–4 %.

Suggested Citation

  • Chen, Rui & Jiang, Haiqi & Guo, Tingyu & Fan, Chenyou, 2025. "Can Large Language Models forecast carbon price movements? Evidence from Chinese carbon markets," Research in International Business and Finance, Elsevier, vol. 77(PB).
    • Handle: RePEc:eee:riibaf:v:77:y:2025:i:pb:s0275531925002077
    DOI: 10.1016/j.ribaf.2025.102951
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    More about this item

    Keywords

    Carbon Price Forecasting; Large Language Models; Financial Sentiment Analysis; Machine Learning;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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