Machine learning approach to stock price crash risk

Abdullah Karasan (), Ozge Sezgin Alp () and Gerhard-Wilhelm Weber ()
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Abdullah Karasan: University of Maryland, Baltimore County
Ozge Sezgin Alp: Baskent University
Gerhard-Wilhelm Weber: Poznan University of Technology

Annals of Operations Research, 2025, vol. 350, issue 3, No 6, 1053-1074

Abstract: Abstract In this study, we propose a novel machine-learning-based measure for stock price crash risk, utilizing the minimum covariance determinant methodology. Employing this newly introduced dependent variable, we predict stock price crash risk through cross-sectional regression analysis. The findings confirm that the proposed method effectively captures stock price crash risk, with the model demonstrating strong performance in terms of both statistical significance and economic relevance. Furthermore, leveraging a newly developed firm-specific investor sentiment index, the analysis identifies a positive correlation between stock price crash risk and firm-specific investor sentiment. Specifically, higher levels of sentiment are associated with an increased likelihood of stock price crash risk. This relationship remains robust across different firm sizes and when using the detoned version of the firm-specific investor sentiment index, further validating the reliability of the proposed approach.

Keywords: Finance; Machine learning; Stock price crash risk; Time series; Investor sentiment (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10479-025-06596-7

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