TRACE: Temporal Rule-Anchored Chain-of-Evidence on Knowledge Graphs for Interpretable Stock Movement Prediction

Can financial news reliably predict short-term stock movements? Despite advances in large language models, this question remains unresolved. We revisit this problem using a zero-shot natural language processing framework, investigating whether models can extract actionable signals from financial news without domain-specific training. We design a structured pipeline that combines zero-shot natural language inference with temporal aggregation, explicitly modelling recency and event-dependent impact horizons when integrating information across articles. To address the need for transparency in high-stakes settings, we introduce a multi-layered explainability framework that links predictions to token-level, article-level, and aggregate evidence, and produces grounded natural language rationales. Across multiple models and prediction horizons, we find that zero-shot approaches consistently fail to outperform simple baselines, with particularly weak performance on negative movements, suggesting deeper structural limitations in mapping news sentiment to short-term price dynamics. However, explainability signals reliably distinguish between trustworthy and unreliable predictions, offering practical value even when accuracy is limited. These findings highlight the limits of zero-shot financial NLP and motivate a shift toward decision-support systems that prioritise transparency and uncertainty awareness. Code: https://github.com/alimert05/zero-shot-stock-xai

In finance, interpreting machine learning predictions is essential, yet the numerical outputs of explainable AI can be difficult for non-experts to understand. While large language models (LLMs) can translate these outputs into natural language, they may produce errors when inferring numerical changes and feature relations. We propose an LLM narrative framework for cross-sectional stock return prediction that combines temporal Shapley additive explanations (SHAP) evidence with historical regime analogs. Temporal evidence tracks changes in the normalized global SHAP importance of an XGBoost model over six months. Historical analogs are past periods with similar changes in SHAP importance, their model performance and subsequent market returns are provided as comparative context. Using this framework, we conduct a controlled study of progressive reasoning externalization, sequentially providing raw SHAP sequences, deterministic temporal descriptors, and feature relations. Each generated claim is verified against provenance-linked evidence. Across Qwen3, externalizing numerical and relational reasoning improved evidence faithfulness as well as temporal and relational accuracy. Evidence faithfulness increased from 0.696 to 0.996 for Qwen3-32B-Instruct. While historical analogs did not improve structured automatic faithfulness, they received higher human-rated usefulness scores. These results suggest that externalizing verifiable reasoning enhances narrative faithfulness and that historical context adds interpretive value.

Aggregate performance on continuous-time dynamic graphs (CTDGs) combines, in a single score, the portion attributable to known temporal regularities and the additional predictive power of neural models. This study separates the two at the query level. We construct a mechanism-constrained predictor that uses pair recurrence, recency and history position, renewal patterns, and short sequential transitions while learning the compatibility within each mechanism. Across four CTDG datasets, this predictor recovers a substantial portion of the performance of strong neural baselines, and the recovered performance quickly saturates with a small, dataset-specific set of explicit mechanisms. Neural residuals concentrate on queries for which the positive and negative candidates have similar mechanism-execution profiles. Allowing conditional interactions among mechanisms is more effective than simply reweighting their existing contributions. Conditioning the contribution of one mechanism on the execution state of another recovers 54.9-73.2% of the original neural-only queries and improves overall paired accuracy on all four datasets. Although the magnitude of the effect varies across datasets, these results show that the performance gap of neural CTDG models need not be treated solely as an opaque difference in representational capacity. At least part of the gap is localized to queries with similar candidate execution profiles and can be functionally explained by conditional coordination among known, low-dimensional mechanisms.