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Regime-aware financial volatility forecasting via in-context learning

arXiv cs.LG / 3/12/2026

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Key Points

  • The paper presents a regime-aware in-context learning framework that uses pretrained LLMs for financial volatility forecasting under nonstationary market conditions without parameter fine-tuning.
  • It introduces an oracle-guided refinement procedure to construct regime-aware demonstrations and conditional sampling based on the estimated market regime.
  • An LLM is deployed as an in-context learner to predict next-step volatility from input sequences using demonstrations conditioned on the estimated regime.
  • The conditional sampling strategy enables the LLM to adapt to regime-dependent volatility dynamics through contextual reasoning alone.
  • Experiments on multiple financial datasets show the approach outperforms classical volatility forecasting methods and one-shot learning, especially during high-volatility periods.

Abstract

This work introduces a regime-aware in-context learning framework that leverages large language models (LLMs) for financial volatility forecasting under nonstationary market conditions. The proposed approach deploys pretrained LLMs to reason over historical volatility patterns and adjust their predictions without parameter fine-tuning. We develop an oracle-guided refinement procedure that constructs regime-aware demonstrations from training data. An LLM is then deployed as an in-context learner that predicts the next-step volatility from the input sequence using demonstrations sampled conditional to the estimated market label. This conditional sampling strategy enables the LLM to adapt its predictions to regime-dependent volatility dynamics through contextual reasoning alone. Experiments with multiple financial datasets show that the proposed regime-aware in-context learning framework outperforms both classical volatility forecasting approaches and direct one-shot learning, especially during high-volatility periods.