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Calibration-Induced Degeneracy in LLM Financial Forecasting: An Audit-Trailed Case Study on Next-Day Market Risk

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  • Arin Mohanty

Abstract

Costly LLM features matter only if calibration lets them affect the forecast. We document a failure of this link in a next-day risk study of two broad-market funds. Full-history scoring preceded the 2022 calibration. Calibration then set all four LLM weights to zero. The 856 later scores therefore could not affect the evaluation. We call this calibration-induced degeneracy. Allowing signed weights reactivated all four mappings. None improved forecasts after familywise correction. By contrast, a near-zero-cost headline count reduced SPY variance-forecast loss by 0.001720 (95 percent familywise interval: [0.000719, 0.002830]). The cheap baseline is therefore a critical diagnostic. We propose a calibration-viability checkpoint. Fit the mapping, perturb the feature over prespecified calibration values, and require a meaningful forecast response before acquiring holdout features. The check uses no holdout outcomes. Here, it would have stopped the paid full-history inference phase.

Suggested Citation

  • Arin Mohanty, 2026. "Calibration-Induced Degeneracy in LLM Financial Forecasting: An Audit-Trailed Case Study on Next-Day Market Risk," Papers 2608.20304, arXiv.org.
    • Handle: RePEc:arx:papers:2608.20304
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