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Towards Causal Market Simulators

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  • Dennis Thumm
  • Luis Ontaneda Mijares

Abstract

Market generators using deep generative models have shown promise for synthetic financial data generation, but existing approaches lack causal reasoning capabilities essential for counterfactual analysis and risk assessment. We propose a Time-series Neural Causal Model VAE (TNCM-VAE) that combines variational autoencoders with structural causal models to generate counterfactual financial time series while preserving both temporal dependencies and causal relationships. Our approach enforces causal constraints through directed acyclic graphs in the decoder architecture and employs the causal Wasserstein distance for training. We validate our method on synthetic autoregressive models inspired by the Ornstein-Uhlenbeck process, demonstrating superior performance in counterfactual probability estimation with L1 distances as low as 0.03-0.10 compared to ground truth. The model enables financial stress testing, scenario analysis, and enhanced backtesting by generating plausible counterfactual market trajectories that respect underlying causal mechanisms.

Suggested Citation

  • Dennis Thumm & Luis Ontaneda Mijares, 2025. "Towards Causal Market Simulators," Papers 2511.04469, arXiv.org, revised Nov 2025.
  • Handle: RePEc:arx:papers:2511.04469
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