Explainable AI Models of Stock Crashes: A Machine-Learning Explanation of the Covid March 2020 Equity Meltdown

18 Pages Posted: 22 Mar 2021 Last revised: 29 Mar 2021

See all articles by Jean-Jacques Ohana

Jean-Jacques Ohana

affiliation not provided to SSRN

Steve Ohana

ESCP Europe

Eric Benhamou

LAMSADE- Paris Dauphine University; EB AI Advisory

David Saltiel

A.I. Square Connect; AI For Alpha

Beatrice Guez

A.I. Square Connect

Date Written: March 21, 2021

Abstract

We consider a gradient boosting decision trees (GBDT) approach to predict large S&P 500 price drops from a set of 150 technical, fundamental and macroeconomic features. We report an improved accuracy of GBDT over other machine learning (ML) methods on the S&P 500 futures prices. We show that retaining fewer and carefully selected features provides improvements across all ML approaches. Shapley values have recently been introduced from game theory to the field of ML. They allow for a robust identification of the most important variables predicting stock market crises, and of a local explanation of the crisis probability at each date, through a consistent features attribution. We apply this methodology to analyze in detail the March 2020 financial meltdown, for which the model offered a timely out of sample prediction. This analysis unveils in particular the contrarian predictive role of the tech equity sector before and after the crash.

Keywords: market crash, GBDT, Shapley

JEL Classification: G1, D5

Suggested Citation

Ohana, Jean-Jacques and Ohana, Steve and Benhamou, Eric and Saltiel, David and Guez, Beatrice, Explainable AI Models of Stock Crashes: A Machine-Learning Explanation of the Covid March 2020 Equity Meltdown (March 21, 2021). Available at SSRN: https://ssrn.com/abstract=3809308 or http://dx.doi.org/10.2139/ssrn.3809308

Jean-Jacques Ohana

affiliation not provided to SSRN

Steve Ohana

ESCP Europe ( email )

79 Avenue de la Republique
Paris, 75011
France

Eric Benhamou (Contact Author)

LAMSADE- Paris Dauphine University ( email )

Place du Marechal de Lattre de Tassigny
Pais, 75016
France

HOME PAGE: http://www.lamsade.dauphine.fr/wp/miles/

EB AI Advisory ( email )

35 Boulevard d'Inkermann
Neuilly sur Seine, 92200
France

David Saltiel

A.I. Square Connect ( email )

35 Boulevard d'Inkermann
Neuilly sur Seine, 92200
France

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

Beatrice Guez

A.I. Square Connect ( email )

35 Boulevard d'Inkermann
Neuilly sur Seine, 92200
France

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