Predicting Market Troughs: A Machine Learning Approach with Causal Interpretation

ArXiv ID: 2509.05922 “View on arXiv”

Authors: Peilin Rao, Randall R. Rojas

Abstract

This paper provides robust, new evidence on the causal drivers of market troughs. We demonstrate that conclusions about these triggers are critically sensitive to model specification, moving beyond restrictive linear models with a flexible DML average partial effect causal machine learning framework. Our robust estimates identify the volatility of options-implied risk appetite and market liquidity as key causal drivers, relationships misrepresented or obscured by simpler models. These findings provide high-frequency empirical support for intermediary asset pricing theories. This causal analysis is enabled by a high-performance nowcasting model that accurately identifies capitulation events in real-time.

Keywords: Causal Machine Learning, DML (Double Machine Learning), Market Troughs, Intermediary Asset Pricing, Nowcasting, Equities

Complexity vs Empirical Score

• Math Complexity: 8.5/10
• Empirical Rigor: 9.0/10
• Quadrant: Holy Grail
• Why: The paper employs advanced causal machine learning (DML, APE) with high-dimensional data, justifying a high math score, while its detailed backtesting, extensive data sourcing, and implementation-focused pipeline indicate strong empirical rigor.

  flowchart TD
    A["Research Goal: Identify Causal Drivers<br>of Market Troughs"] --> B["Data: High-Frequency Market Data<br>Options Implied Volatility<br>Liquidity Indicators"]
    
    B --> C{"Methodology: Causal ML"}
    C --> D["Computational Process 1<br>Flexible DML Framework"]
    C --> E["Computational Process 2<br>Nowcasting Capitulation Events"]
    
    D --> F["Key Findings: Robust Causal Estimates"]
    E --> F
    
    F --> G["Outcomes"]
    G --> H["1. Volatility of Options-Implied<br>Risk Appetite is a Key Driver"]
    G --> I["2. Market Liquidity is a Key Driver"]
    G --> J["3. Misrepresented by<br>Simpler Linear Models"]
    G --> K["4. Support for<br>Intermediary Asset Pricing Theories"]