Enhancing Profitability and Investor Confidence through Interpretable AI Models for Investment Decisions

TL;DR

This paper introduces an interpretable AI model using SHAP for stock investment forecasts, improving transparency, stakeholder trust, and portfolio performance in volatile markets.

Contribution

It presents a novel interpretable decision-making model that enhances financial forecasting transparency and stakeholder confidence using SHAP explainability techniques.

Findings

Improved investor confidence through model interpretability

Enhanced portfolio value with proposed trading strategies

Demonstrated effectiveness in volatile market conditions

Abstract

Financial forecasting plays an important role in making informed decisions for financial stakeholders, specifically in the stock exchange market. In a traditional setting, investors commonly rely on the equity research department for valuable reports on market insights and investment recommendations. The equity research department, however, faces challenges in effectuating decision-making do to the demanding cognitive effort required for analyzing the inherently volatile nature of market dynamics. Furthermore, financial forecasting systems employed by analysts pose potential risks in terms of interpretability and gaining the trust of all stakeholders. This paper presents an interpretable decision-making model leveraging the SHAP-based explainability technique to forecast investment recommendations. The proposed solution not only provides valuable insights into the factors that influence forecasted recommendations but also caters the investors of varying types, including those interested in daily and short-term investment opportunities. To ascertain the efficacy of the proposed model, a case study is devised that demonstrates a notable enhancement in investor's portfolio value, employing our trading strategies. The results highlight the significance of incorporating interpretability in forecasting models to boost stakeholders' confidence and foster transparency in the stock exchange domain.