Out‐of‐sample predictability of firm‐specific stock price crashes: A machine learning approach

Abstract We use machine learning methods to predict firm‐specific stock price crashes and evaluate the out‐of‐sample prediction performance of various methods, compared to traditional regression approaches. Using financial and textual data from 10‐K filings, our results show that a logistic regression with financial data inputs performs reasonably well and sometimes outperforms newer classifiers such as random forests and neural networks. However, we find that a stochastic gradient boosting model systematically outperforms the logistic regression, and forecasts using suitable combinations of financial and textual data inputs yield significantly higher prediction performance. Overall, the evidence suggests that machine learning methods can help predict stock price crashes.

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Publication Details

Journal
Journal of Business Finance &amp Accounting
Published
2024-09-16
DOI
https://doi.org/10.1111/jbfa.12831
Citations
9
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
4.31
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article

Out‐of‐sample predictability of firm‐specific stock price crashes: A machine learning approach

Doron Reichmann, Milan Reichmann, Devrimi Kaya
9 citations
Journal of Business Finance &amp Accounting
Financial Markets and Investment Strategies
4.31
article

Out‐of‐sample predictability of firm‐specific stock price crashes: A machine learning approach

Doron Reichmann, Milan Reichmann, Devrimi Kaya
article en
9 citations

Abstract

Abstract We use machine learning methods to predict firm‐specific stock price crashes and evaluate the out‐of‐sample prediction performance of various methods, compared to traditional regression approaches. Using financial and textual data from 10‐K filings, our results show that a logistic regression with financial data inputs performs reasonably well and sometimes outperforms newer classifiers such as random forests and neural networks. However, we find that a stochastic gradient boosting model systematically outperforms the logistic regression, and forecasts using suitable combinations of financial and textual data inputs yield significantly higher prediction performance. Overall, the evidence suggests that machine learning methods can help predict stock price crashes.

Journal of Business Finance &amp AccountingVol. 52(2)
Goethe University Frankfurt (DE), Friedrich-Alexander-Universität Erlangen-Nürnberg (DE), Leipzig University (DE)
Openalex Percentile: Top 5%
Financial Markets and Investment Strategies
4.31
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