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Using Neural Networks and Genetic Algorithms to Predict Stock Market Returns

Using Neural Networks and Genetic Algorithms to Predict Stock Market Returns

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Published by Dang Trong Duc

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Published by: Dang Trong Duc on Nov 11, 2012
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09/01/2013

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Having in mind the findings of our study we resulted in the following conclusions:

Using the type of data we have used, in conjunction with AR or feed forward NN

models to capture patterns in the stock market data over long time periods, it will not be

possible to improve on the predictive ability of naïve predictors, no matter which

parameters are selected for the models. Having in mind that the randomness tests

rejected randomness for all our series, we believe that their inability to beat naïve

predictors is due to the following facts: a) The use of daily data makes it difficult for the

models to recognize clearly trends and patterns that exist in the data, in other words

daily data include high level of noise and b) We tried to find patterns in our datasets

throughout long time periods, perhaps such global patterns do not exist. This does not

imply randomness; there might be patterns in smaller sets (local patterns) that in total

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are not recognizable because those of one period refute those of another. Case study 4

indicated that such patterns do exist.

Furthermore the use of naïve predictors as benchmarks for the models we constructed

proved that, although naïve, some of them are difficult to beat. The most difficult to

beat were proved to be those that predicted no change or almost no change of the value

of the Market (a and c). Out of all naïve predictors we applied we suggest predictors a

and c, or else we suggest the use of predictors that are based on the ‘no change of the

value of the market’ concept. Evaluation of the performance using metrics such as the

mean absolute error (mae) cannot depict clearly the predictive power of a model and

their interpretation can easily result to misleading conclusions, as it did in case study 3

(paragraph 2.2.3.4).

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