Developing a Neuro-Financial Instability Index for Early Detection of Systemic Risk during Regime shift in Stock Market

Abstract

In this study, we propose a novel Neuro-Financial Instability Index (NFII) framework to identify and analyze systemic risk indicators in mixed financial markets during the period of April 2023 to March 2025. The NFII framework integrates volatility, sentiment, fear indicators, SHAP analysis, and regime-switching diagnostics to identify high impact stocks. Results of experiments highlight cryptocurrencies (BTC and ETH) as the major drivers of systemic risk rather than S&P 500. Non- linear instability and fat-tailed behavior post-2024 was observed using periodic decomposition whereas SHAP analysis highlighted significant contributions related to behavioral risk. These results support the need for adaptive surveillance systems, interpretable hybrid modeling, and revised diversification strategies using high frequency blockchain analytics and multilayer contagion networks.