# To Trade or Not to Trade: An Agentic Approach to Estimating Market Risk Improves Trading Decisions

arXiv: https://arxiv.org/abs/2507.08584 · HTML: https://mlsanity.com/paper/2507.08584/

## Key facts

- Cited by 2 papers in the map (data through 14 Oct 2026).
- Placed in Financial trading and forecasting agents, one of 16 directions in LLM agents and tool use.
- Builds on 33 of its 59 references that are in the map.
- First posted on arXiv 11 Jul 2025.

## Placed in

- LLM agents and tool use / [Financial trading and forecasting agents](https://mlsanity.com/agents/financial-trading-and-forecasting-agents/)

## Builds on (most cited first, 30 of 33)

- [DeepSeek-R1: Incentivizing Reasoning Capability in LLMs via Reinforcement Learning](https://mlsanity.com/paper/2501.12948/) (2025)
- [τ-bench: A Benchmark for Tool-Agent-User Interaction in Real-World Domains](https://mlsanity.com/paper/2406.12045/) (2024)
- [The AI Scientist: Towards Fully Automated Open-Ended Scientific Discovery](https://mlsanity.com/paper/2408.06292/) (2024)
- [DSPy: Compiling Declarative Language Model Calls into Self-Improving Pipelines](https://mlsanity.com/paper/2310.03714/) (2023)
- [Can Large Language Models Be an Alternative to Human Evaluations?](https://mlsanity.com/paper/2305.01937/) (2023)
- [Accelerating scientific discovery with Co-Scientist](https://mlsanity.com/paper/2502.18864/) (2025)
- [Demonstrate-Search-Predict: Composing retrieval and language models for knowledge-intensive NLP](https://mlsanity.com/paper/2212.14024/) (2022)
- [LongRoPE: Extending LLM Context Window Beyond 2 Million Tokens](https://mlsanity.com/paper/2402.13753/) (2024)
- [The Illusion of Thinking: Understanding the Strengths and Limitations of Reasoning Models via the Lens of Problem Complexity](https://mlsanity.com/paper/2506.06941/) (2025)
- [On Neural Differential Equations](https://mlsanity.com/paper/2202.02435/) (2022)
- [Large Language Models in Finance: A Survey](https://mlsanity.com/paper/2311.10723/) (2023)
- [TradingAgents: Multi-Agents LLM Financial Trading Framework](https://mlsanity.com/paper/2412.20138/) (2024)
- [FinMem: A Performance-Enhanced LLM Trading Agent with Layered Memory and Character Design](https://mlsanity.com/paper/2311.13743/) (2023)
- [From LLM Reasoning to Autonomous AI Agents: A Comprehensive Review](https://mlsanity.com/paper/2504.19678/) (2025)
- [A Survey of Frontiers in LLM Reasoning: Inference Scaling, Learning to Reason, and Agentic Systems](https://mlsanity.com/paper/2504.09037/) (2025)
- [Agentic Large Language Models, a survey](https://mlsanity.com/paper/2503.23037/) (2025)
- [Revolutionizing Finance with LLMs: An Overview of Applications and Insights](https://mlsanity.com/paper/2401.11641/) (2024)
- [A Survey of Large Language Models for Financial Applications: Progress, Prospects and Challenges](https://mlsanity.com/paper/2406.11903/) (2024)
- [Open-Endedness is Essential for Artificial Superhuman Intelligence](https://mlsanity.com/paper/2406.04268/) (2024)
- [OMNI-EPIC: Open-endedness via Models of human Notions of Interestingness with Environments Programmed in Code](https://mlsanity.com/paper/2405.15568/) (2024)
- [Large Language Model Agent in Financial Trading: A Survey](https://mlsanity.com/paper/2408.06361/) (2024)
- [Alpha-GPT: Human-AI Interactive Alpha Mining for Quantitative Investment](https://mlsanity.com/paper/2308.00016/) (2023)
- [Human Creativity in the Age of LLMs: Randomized Experiments on Divergent and Convergent Thinking](https://mlsanity.com/paper/2410.03703/) (2024)
- [Automated Statistical Model Discovery with Language Models](https://mlsanity.com/paper/2402.17879/) (2024)
- [LeDex: Training LLMs to Better Self-Debug and Explain Code](https://mlsanity.com/paper/2405.18649/) (2024)
- [Text Summarization Using Large Language Models: A Comparative Study of MPT-7b-instruct, Falcon-7b-instruct, and OpenAI Chat-GPT Models](https://mlsanity.com/paper/2310.10449/) (2023)
- [MacGyver: Are Large Language Models Creative Problem Solvers?](https://mlsanity.com/paper/2311.09682/) (2023)
- [Automate Strategy Finding with LLM in Quant Investment](https://mlsanity.com/paper/2409.06289/) (2024)
- [TradExpert: Revolutionizing Trading with Mixture of Expert LLMs](https://mlsanity.com/paper/2411.00782/) (2024)
- [From Deep Learning to LLMs: A survey of AI in Quantitative Investment](https://mlsanity.com/paper/2503.21422/) (2025)

## Built on by (most cited first, 2 of 2)

- [LiveTradeBench: Seeking Real-World Alpha with Large Language Models](https://mlsanity.com/paper/2511.03628/) (2025)
- [SoK: Trading Agents or Market Crashers? Dissecting Robustness and Security Failures in Academic Financial LLM Trading Schemes](https://mlsanity.com/paper/2609.19705/) (2026)

## Abstract (arXiv)

Large language models (LLMs) are increasingly deployed in agentic frameworks, in which prompts trigger complex tool-based analysis in pursuit of a goal. While these frameworks have shown promise across multiple domains including in finance, they typically lack a principled model-building step, relying instead on sentiment- or trend-based analysis. We address this gap by developing an agentic system that uses LLMs to iteratively discover stochastic differential equations for financial time series. These models generate risk metrics which inform daily trading decisions. We evaluate our system in both traditional backtests and using a market simulator, which introduces synthetic but causally plausible price paths and news events. We find that model-informed trading strategies outperform standard LLM-based agents, improving Sharpe ratios across multiple equities. Our results show that combining LLMs with agentic model discovery enhances market risk estimation and enables more profitable trading decisions.