Enhancing economic cycle forecasting based on interpretable machine learning and news narrative sentiment

Weixin Sun, Yong Wang, Li Zhang, Xihui Haviour Chen and Yen Hai Hoang

Technological Forecasting and Social Change, 2025, vol. 215, issue C

Abstract: The growing prevalence of uncertainty in global events poses significant challenges to economic cycle forecasting, emphasizing the need for more robust predictive models. This study addresses this gap by developing a novel forecasting framework that integrates multiple uncertainty indices to improve accuracy, stability, and interpretability, particularly during uncertainty shocks. To achieve this, several methodological innovations were implemented. First, news sentiment-based uncertainty indices were incorporated as candidate variables to capture uncertainty dynamics. Second, Bayesian least absolute shrinkage and selection operator (Bayesian LASSO) was employed for efficient variable selection, mitigating the curse of dimensionality in small samples. Third, the multi-objective Lichtenberg algorithm (MOLA) was applied to optimize the prediction window size, ensuring model robustness. Additionally, a MOLA-based extreme gradient boosting (MOLA-XGBoost) model was developed to fine-tune hyperparameters across dimensions of prediction accuracy, stability, and directional consistency. Finally, SHapley Additive exPlanations (SHAP) theory was used to enhance model interpretability. This study forecasts China's economic cycle using multiple indicators, demonstrating that the proposed approach consistently delivers accurate and robust predictions even under uncertainty shocks. The findings highlight the crucial role of uncertainty indices in improving economic forecasts, offering new insights and methodologies for predictive modeling in volatile environments.

Keywords: Economic cycle; Interpretable machine learning; News narrative sentiment; Uncertainty indices; Prediction (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:tefoso:v:215:y:2025:i:c:s0040162525001258

DOI: 10.1016/j.techfore.2025.124094

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