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Forecasting Using ANN's

Forecasting Using ANN's

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Published by Andaleeb Mudasira
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Published by: Andaleeb Mudasira on May 20, 2011
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Forecasting of Stock Market PriceUsing NeuralNetworks
8/25/2010 
Mudesira Munir
Managers must realize and accept the limitationsof forecasting and the uncertainty associated withall forms of predictions; otherwise, unexpectedresults and unpleasant surprises may await them.As long as the patterns or relationships do notchange, forecasting will be accurate. The selectionand implementation of a proper forecastingmethodology has always been a planning andcontrol issue for most firms and agencies. Thisthesis will suggest and describe the application of Artificial Neural Networks for forecasting of stock market closing prices.
 
Chapter
#1
INTRODU
C
TION:
1.1 STO
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MAR 
KE
T
A stock market is a public for the trading of company stock and derivatives at anagreed price; these are securities listed on a stock exchange as well as those only traded privately. The stock market has been one of the most popular investments owing to itshigh returns.The stocks are displayed and traded on stock exchanges which are entities of acorporation or mutual organization specialized in the business of bringing buyers andsellers of the organizations to a listing of stocks and securities together. The major stock market in the America is NYSE while in Canada; it is the Toronto Stock Exchange(TSX).
‡ T
rading
 
Participants in the stock market range from small individual stock investors tolarge hedge fund traders, Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific pricefor the stock. Buying or selling at market means you will accept any price (Bid or Ask)for the stock, respectively. When the prices (Bid or Ask) match, a sale takes place, on afirst come first served basis if there are multiple bidders or askers at a given price.The stock exchanges are builtin order to facilitate buyers and sellers, thus providing a marketplace. The stock exchanges provide Real Time trading system andinformation for the listed securities.
‡ T
he
b
ehavior
 
of 
 
the
s
tock 
m
arket
 
Positive or upward trends are referred to as bull markets; negative or downwardtrends are referred to as bear markets. Over-reactions may occur so that excessiveoptimism may drive prices unduly high or excessive pessimism may drive prices undulylow. Forecasters continue to debate whether financial markets are generally efficient (EMhypothesis).According to one understanding of the efficient market hypothesis (EMH), onlychanges in fundamental factors, such as the viewpoint for margins, profits or dividends,ought to affect share prices beyond the short term, where random noise in the system data
 
may prevail. But this viewpoint known as hard EMH also predicts that little or no tradingshould take place, contrary to fact, since prices are already at or near equilibrium, having priced in all public knowledge. The hard efficient-market hypothesis is sorely tested bysuch events as the stock market crash in 1987, when the Dow Jones index plummeted22.6 percent the largest-ever one-day fall in the United States.
1.2 STO
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MAR 
KE
T INDI
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Stock market indices are classified in many ways. A global stock market indexincludes typically large companies without regard for where they are traded. Theexamples are MSCI World and S&P Global 100.Each country or nation has its own stock market index representing its performance. The most commonly quoted market indices are national indices composedof the stocks of large companies listed on a nation's largest stock exchanges, such as theAmerican S&P 500, the Japanese Nikkei 225, and the Karachi KSE 100.The idea may be extended well beyond an exchange. The Dow Jones Total Stock Market Index represents the stocks of nearly every publicly traded company in the UnitedStates, including all U.S. stocks traded on the New York Stock Exchange (NYSE) andmostly traded on the NASDAQ and American Stock Exchange (AMEX). Morespecialized indices exist tracking the performance of specific sectors of the market.
1.3 IND
EX
V
E
RSIONS
The indexes, such as the S&P 500, have many versions. These versions can vary based on how the index components are weighted and on how dividends are accountedfor. For example, there are three (3) versions of the S&P 500 index: price return, whichonly considers the price of the components, total return, which accounts for dividendreinvestment, and net total return, which accounts for dividend reinvestment after thededuction of a withholding tax.
1.4 MOST POPULAR AND LARG
E
ST STO
CK 
MAR 
KE
TS:1.4.1 Am
erican
S
tock 
 
Exchange
(AM
EX)
:
Today AMEX is one of the largest options exchanges in the United States.
1.4.2 N
ew
Y
ork 
S
tock 
 
Exchange
(NYS
E)
:
 NYSE is founded in 1792, the Big Board is the where the big companies haveshares. The NYSE is where companies such as Coca cola, McDonald's, General Electric

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