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Ex Machina: financial stability in the age of artificial intelligence

Author

Listed:
  • Anand, Kartik
  • Leonello, Agnese
  • Panetti, Ettore
  • Kazinnik, Sophia

Abstract

Does artificial intelligence (AI) pose a threat to financial stability? We study AI investor behavior, specifically Q-learning and large language model (LLM) investors, in a mutual fund redemption problem with economic and strategic uncertainty. Different AI architectures generate systematically different outcomes. Q-learning investors coordinate well but under default risk exhibit excessive redemption that amplifies fragility. LLM investors internalize equilibrium structure but display belief heterogeneity, weakening coordination and predictability. Our findings show that AI architecture is a first-order determinant of financial stability. JEL Classification: G01, G23, C63

Suggested Citation

  • Anand, Kartik & Leonello, Agnese & Panetti, Ettore & Kazinnik, Sophia, 2026. "Ex Machina: financial stability in the age of artificial intelligence," Working Paper Series 3225, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20263225
    Note: 2292323
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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