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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A trading desk uses a large language model to summarize central bank communications and generate sentiment scores for use in a systematic strategy. Which risk is most specific to the generative nature of this model rather than to traditional statistical models?

The risk most specific to generative models is hallucination: producing fluent, plausible but factually wrong output. Missing data, unstable coefficients and transaction costs affect conventional quantitative models as well, so they are not distinctive to large language models.

  1. AThe model may produce plausible but factually incorrect outputs, known as hallucinationsCorrect
  2. BThe model's inputs may be subject to missing values
  3. CThe model's coefficients may be unstable over time
  4. DThe model may have higher transaction costs when traded

Explanation

Hallucination, where a generative model produces fluent but false content, is characteristic of large language models. Missing data, parameter instability and trading costs affect traditional models equally and are not specific to generative AI.

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