Stock price crashes in China: an artificial neural network approach

Abstract

Purpose

This paper aims to use artificial neural network (ANN) methods to predict stock price crashes in the Chinese equity market.

Design/methodology/approach

Three ANN models are developed and compared with the logistic regression model.

Findings

Results from this study conclude that the ANN approaches outperform the traditional logistic regression model, with fewer hidden layers in the ANN model having superior performance compared to the ANNs with multiple hidden layers. Results from the ANN approach also reveal that foreign institutional ownership, financial leverage, weekly average return and market-to-book ratio are the important variables when predicting stock price crashes, consistent with results from the traditional logistic model.

Originality/value

First, the ANN framework has been used in this study to forecast the stock price crashes and compared to the traditional logistic model in the world’s largest emerging market China. Second, the receiver operating characteristics curves and the area under the ROC curve have been used to evaluate the forecasting performance between the ANNs and the traditional approaches, in addition to some traditional performance evaluation methods.

Citation

Wang, L., Zou, L. and Wu, J. (2023), "Stock price crashes in China: an artificial neural network approach", Pacific Accounting Review, Vol. 35 No. 4, pp. 645-669. https://doi.org/10.1108/PAR-08-2022-0121