Sentiment-Aware Stock Price Prediction with Transformer and LLM-Generated Formulaic Alpha

TL;DR

This paper presents a novel framework combining large language models and Transformer architectures to generate and utilize formulaic alphas for improved stock price prediction, enhancing accuracy and interpretability.

Contribution

It introduces an automated method for generating formulaic alphas using LLMs and integrates them into predictive models, advancing the automation and effectiveness of financial forecasting.

Findings

LLM-generated alphas improve prediction accuracy

Enhanced interpretability through natural language reasoning

Effective integration with multiple prediction models

Abstract

Traditionally, traders and quantitative analysts address alpha decay by manually crafting formulaic alphas, mathematical expressions that identify patterns or signals in financial data, through domain expertise and trial-and-error. This process is often time-consuming and difficult to scale. With recent advances in large language models (LLMs), it is now possible to automate the generation of such alphas by leveraging the reasoning capabilities of LLMs. This paper introduces a novel framework that integrates a prompt-based LLM with a Transformer model for stock price prediction. The LLM first generates diverse and adaptive alphas using structured inputs such as historical stock features (Close, Open, High, Low, Volume), technical indicators, sentiment scores of both target and related companies. These alphas, instead of being used directly for trading, are treated as high-level features that capture complex dependencies within the financial data. To evaluate the effectiveness of these LLM-generated formulaic alphas, the alpha features are then fed into prediction models such as Transformer, LSTM, TCN, SVR, and Random Forest to forecast future stock prices. Experimental results demonstrate that the LLM-generated alphas significantly improve predictive accuracy. Moreover, the accompanying natural language reasoning provided by the LLM enhances the interpretability and transparency of the predictions, supporting more informed financial decision-making.