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Fund performance evaluation with explainable artificial intelligence

Author

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  • Kovvuri, Veera Raghava Reddy
  • Fu, Hsuan
  • Fan, Xiuyi
  • Seisenberger, Monika

Abstract

We apply explainable artificial intelligence (xAI) to a large dataset of global equity funds. Our approach combines the XGBoost model with Shapley values; the former is a machine learning framework that enhances model fitness while the latter is an xAI method that provides informed explanations regarding the direction and significance of predictors. Based on macro-finance and fund-level factors, our fund performance evaluation of G10 countries uncovers novel insights into the diversification of country portfolios: both over- and under-diversification are associated with poor performance. Our analysis establishes consistency through a benchmark linear regression model and robustness at country level.

Suggested Citation

  • Kovvuri, Veera Raghava Reddy & Fu, Hsuan & Fan, Xiuyi & Seisenberger, Monika, 2023. "Fund performance evaluation with explainable artificial intelligence," Finance Research Letters, Elsevier, vol. 58(PB).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pb:s1544612323007912
    DOI: 10.1016/j.frl.2023.104419
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    More about this item

    Keywords

    Global Open-Ended Funds; Country portfolios; Herfindahl–Hirschman Index; SHapley Additive exPlanations; Machine learning; eXtreme Gradient Boosting;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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