IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2308.16200.html
   My bibliography  Save this paper

Can Machine Learning Catch Economic Recessions Using Economic and Market Sentiments?

Author

Listed:
  • Kian Tehranian

Abstract

Quantitative models are an important decision-making factor for policy makers and investors. Predicting an economic recession with high accuracy and reliability would be very beneficial for the society. This paper assesses machine learning technics to predict economic recessions in United States using market sentiment and economic indicators (seventy-five explanatory variables) from Jan 1986 - June 2022 on a monthly basis frequency. In order to solve the issue of missing time-series data points, Autoregressive Integrated Moving Average (ARIMA) method used to backcast explanatory variables. Analysis started with reduction in high dimensional dataset to only most important characters using Boruta algorithm, correlation matrix and solving multicollinearity issue. Afterwards, built various cross-validated models, both probability regression methods and machine learning technics, to predict recession binary outcome. The methods considered are Probit, Logit, Elastic Net, Random Forest, Gradient Boosting, and Neural Network. Lastly, discussed different models performance based on confusion matrix, accuracy and F1 score with potential reasons for their weakness and robustness.

Suggested Citation

  • Kian Tehranian, 2023. "Can Machine Learning Catch Economic Recessions Using Economic and Market Sentiments?," Papers 2308.16200, arXiv.org.
    • Handle: RePEc:arx:papers:2308.16200
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2308.16200
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fornari, Fabio & Lemke, Wolfgang, 2010. "Predicting recession probabilities with financial variables over multiple horizons," Working Paper Series 1255, European Central Bank.
    2. Stock, James H. & Watson, Mark W., 2006. "Forecasting with Many Predictors," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 10, pages 515-554, Elsevier.
    3. Wei-Yin Loh, 2014. "Fifty Years of Classification and Regression Trees," International Statistical Review, International Statistical Institute, vol. 82(3), pages 329-348, December.
    4. Periklis Gogas & Theophilos Papadimitriou & Maria Matthaiou & Efthymia Chrysanthidou, 2015. "Yield Curve and Recession Forecasting in a Machine Learning Framework," Computational Economics, Springer;Society for Computational Economics, vol. 45(4), pages 635-645, April.
    5. Kursa, Miron B. & Rudnicki, Witold R., 2010. "Feature Selection with the Boruta Package," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 36(i11).
    6. Rickard Nyman & Paul Ormerod, 2020. "Understanding the Great Recession Using Machine Learning Algorithms," Papers 2001.02115, arXiv.org.
    7. Zihao Wang & Kun Li & Steve Q. Xia & Hongfu Liu, 2021. "Economic Recession Prediction Using Deep Neural Network," Papers 2107.10980, arXiv.org.
    8. Arturo Estrella & Frederic S. Mishkin, 1996. "The yield curve as a predictor of U.S. recessions," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Jun).
    9. Allan Layton & Anirvan Banerji, 2003. "What is a recession?: A reprise," Applied Economics, Taylor & Francis Journals, vol. 35(16), pages 1789-1797.
    10. Maria Kovacova & Tomas Kliestik, 2017. "Logit and Probit application for the prediction of bankruptcy in Slovak companies," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 12(4), pages 775-791, December.
    11. Sunil Sapra, 2005. ""A regression error specification test (RESET) for generalized linear models"," Economics Bulletin, AccessEcon, vol. 3(1), pages 1-6.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chanjuan Liu & Ruining Zhang & Yu Zhang & Enqiang Zhu, 2023. "A Formal Representation for Intelligent Decision-Making in Games," Mathematics, MDPI, vol. 11(22), pages 1-11, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lorenzo Bencivelli & Massimiliano Marcellino & Gianluca Moretti, 2017. "Forecasting economic activity by Bayesian bridge model averaging," Empirical Economics, Springer, vol. 53(1), pages 21-40, August.
    2. Michael Puglia & Adam Tucker, 2020. "Machine Learning, the Treasury Yield Curve and Recession Forecasting," Finance and Economics Discussion Series 2020-038, Board of Governors of the Federal Reserve System (U.S.).
    3. Marius M. Mihai, 2020. "Do credit booms predict US recessions?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(6), pages 887-910, September.
    4. Maas, Benedikt, 2019. "Nowcasting and forecasting US recessions: Evidence from the Super Learner," MPRA Paper 96408, University Library of Munich, Germany.
    5. Andreas Dellnitz & Andreas Kleine & Madjid Tavana, 2024. "An integrated data envelopment analysis and regression tree method for new product price estimation," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 46(4), pages 1189-1211, December.
    6. Chen, Qitong & Hong, Yongmiao & Li, Haiqi, 2024. "Time-varying forecast combination for factor-augmented regressions with smooth structural changes," Journal of Econometrics, Elsevier, vol. 240(1).
    7. Davide Pettenuzzo & Francesco Ravazzolo, 2016. "Optimal Portfolio Choice Under Decision‐Based Model Combinations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1312-1332, November.
    8. Ivan Kitov & Oleg Kitov, 2013. "Does Banque de France control inflation and unemployment?," Papers 1311.1097, arXiv.org.
    9. Paul Viefers & Ferdinand Fichtner & Simon Junker & Maximilian Podstawski, 2014. "Filtering German Economic Conditions from a Large Dataset: The New DIW Economic Barometer," Discussion Papers of DIW Berlin 1414, DIW Berlin, German Institute for Economic Research.
    10. Kim, Hyun Hak & Swanson, Norman R., 2018. "Mining big data using parsimonious factor, machine learning, variable selection and shrinkage methods," International Journal of Forecasting, Elsevier, vol. 34(2), pages 339-354.
    11. Tong, Jianfeng & Liu, Zhenxing & Zhang, Yong & Zheng, Xiujuan & Jin, Junyang, 2023. "Improved multi-gate mixture-of-experts framework for multi-step prediction of gas load," Energy, Elsevier, vol. 282(C).
    12. Andrea Carriero & George Kapetanios & Massimiliano Marcellino, 2011. "Forecasting large datasets with Bayesian reduced rank multivariate models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(5), pages 735-761, August.
    13. Yi, Yongsheng & Ma, Feng & Zhang, Yaojie & Huang, Dengshi, 2019. "Forecasting stock returns with cycle-decomposed predictors," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 250-261.
    14. Asma Shaheen & Javed Iqbal, 2018. "Spatial Distribution and Mobility Assessment of Carcinogenic Heavy Metals in Soil Profiles Using Geostatistics and Random Forest, Boruta Algorithm," Sustainability, MDPI, vol. 10(3), pages 1-20, March.
    15. Bowsher, Clive G. & Meeks, Roland, 2008. "The Dynamics of Economic Functions: Modeling and Forecasting the Yield Curve," Journal of the American Statistical Association, American Statistical Association, vol. 103(484), pages 1419-1437.
    16. Ramón Ferri-García & María del Mar Rueda, 2022. "Variable selection in Propensity Score Adjustment to mitigate selection bias in online surveys," Statistical Papers, Springer, vol. 63(6), pages 1829-1881, December.
    17. Mr. Prakash Kannan & Mr. Selim A Elekdag, 2009. "Incorporating Market Information into the Construction of the Fan Chart," IMF Working Papers 2009/178, International Monetary Fund.
    18. Yongsung Chang & Sunoong Hwang, 2015. "Asymmetric Phase Shifts in U.S. Industrial Production Cycles," The Review of Economics and Statistics, MIT Press, vol. 97(1), pages 116-133, March.
    19. Pami Dua & Anirvan Banerji, 2011. "Predicting Recessions and Slowdowns: A Robust Approach," Working Papers id:4391, eSocialSciences.
    20. Mestekemper, Thomas & Windmann, Michael & Kauermann, Göran, 2010. "Functional hourly forecasting of water temperature," International Journal of Forecasting, Elsevier, vol. 26(4), pages 684-699, October.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2308.16200. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.