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on Correlation Dimension

Chen Feng1, Guangrong Ji1, Wencang Zhao1,2, and Rui Nian1

1

Qingdao, 266003, China

fccjg@sdu.edu.cn, grji@mail.ouc.edu.cn,nianrui_80@163.com

2

College of Automation and Electronic Engineering, Qingdao University of Science,

&Technology, Qingdao, 266042, China

wencangzhao@mail.edu.cn

Abstract. In this paper we firstly analysis the chaotic characters of three sets of

the financial time series (Hang Sheng Index (HIS), Shanghai Stock Index and

US gold price) based on the phase space reconstruction. But when we adopt the

feedforward neural networks to predict those time series, we found this method

run short of a criterion in selecting the training set, so we present a new method:

using correlation dimension (CD) as the criterion . By the experiments, the

method is proved effective.

1 Introduction

The prediction of the financial time series is a problem which interest the researchers

at all time because it has important meaning for macro-economic adjustment and

micro-economic management. For predicting the financial time series better researchers made great efforts to find the laws of the time series. In the past the financial time

series were considered random walk and the models were built according to this viewpoint, but the predicted results were proved bad by some experiments [1].

In recent years researchers found that some financial time series are chaotic time

series rather than the random series in fact. Literature [2] indicated that hourly data of

four spot exchange rates (British Pound, Deutschmark, Japanese Yen and Swiss

France) are chaotic; literature [3] pointed out American national debt time series has

chaotic attractor; literature [4] proved that some metal prices in London market follows a mean process that is dynamic chaotic.

Many methods such as the maximum Lyapunov exponent method [5] and one-rank

weighed local method [6] are used to predict the chaotic time series. In maximum

Lyapunov exponent method, a teeny error induced by computing the maximum

Lyapunov exponent will bring large error in the prediction. The idea of one-rank

weighed local method is to use the linear model to resume local chaotic system. But

the linear model always has some limits to mirror the nonlinear system. So the predicted effects of the economic time series are not good enough with these methods.

At the same time owing to the strong nonlinear mapping ability of the neural networks, many kinds of neural networks such as BPNN [7], GRNN [8] and RNN [9]

etc. were used to predict the financial time series. In this paper we adopt the feedforL. Wang, K. Chen, and Y.S. Ong (Eds.): ICNC 2005, LNCS 3610, pp. 1256 1265, 2005.

Springer-Verlag Berlin Heidelberg 2005

1257

ward neural networks used in the literature [10] as the training networks to predict the

financial time series. With this kind of networks introduced in the third section, many

classical chaotic systems such as Lorenz system, Henon mapping etc. can be predicted very well.

But in the process of studying the method, we find the training sets choice is hazy

and run short of a criterion in this method. So at the forth section, we bring forward a

new method to choose the training set. According that the financial time series are

chaotic, we choose the correlation dimension -- a kind of fractal dimension that can

depict the chaotic characteristics as the criterion to choose the training set. By the

experiments the method is proved effective.

If we use the feedforward neural networks to predict the time series, the phase

space must be reconstructed firstly, so in the second section we introduce the delay

coordinate method adopted to reconstruct the space and compute the financial time

series maximum Lyapunov exponents to prove the three sets of financial time series

are chaotic. Then we show the architecture of the neural networks in third section. In

the forth section we explain the definition of the correlation dimension simply, and

introduce how to choose the training set according to the correlation dimension. At

the same time the three sets of economic data are used to prove the effect of the new

method in the fifth section. In the last section, we reach the conclusion.

2.1 Theory Introduction

For resuming the dynamic characteristics of the original financial systems, the phase

space should be reconstructed firstly. Takens theorem, which opens out some nonlinear systems dynamic mechanism, is the theoretic base of the phase space reconstruction.

Takens theorem: M is d dimension manifold mapping : M M is a smooth differential homeomorphism mapping y : M R has second-order continuous derivative

( , y ) : M R 2 d +1 and

( x , y ) = ( y ( x ), y ( ( x ), y ( 2 ( x )), L , y ( 2 d ( x )))

(1)

suitable embedding dimension can be found to resume the inerratic trajectory [11].

The delay coordinate method is used to reconstruct the phase space in the paper. An

embedding dimension m and a delay time are determined to create N m points, and

every point Yi is a m dimension vector,

Y1 = ( x1 , x1+ ,L, x1+ ( m 1) ),L,Yi = ( xi , xi + ,L, xi + ( m 1) ),L,Y N m = ( x N m , x N m +1 ,L, x N )

(2)

where N m = N (m 1) . The embedding dimension m and the delay time are important parameters because they decide the quality of the reconstructed phase space.

In this paper, we use the so-called false nearest-neighbor method [12] to decide the

embedding dimension m . The idea of the method is when the dimension is in-

1258

C. Feng et al.

creased from m to m + 1 , we estimate whether there are false near points in the near

points of the point Yi , if there is none, the geometrical structure of the attractor has

been opened. When the dimension is m , supposing that the point Yi' is the nearest

point of the point Y i , the distance between these two points is

Y Y

i

i '

( m +1)

Y i ' Yi

(m)

Yi ' Yi

(m)

Y i' Y i

Y i' Y i

( m +1)

(m )

.When the

> RT ,10 RT 50

(3)

The point Yi' is the false neighbor point of the point Yi where RT is the threshold .We

start at dimension 2 and increase the dimension by one each time. Either the proportion of the nearest neighbor points is smaller than 5% or the number of the nearest

neighbor points dont decrease with the increase of the dimension, the dimension m is

the optimum.

2.2 Financial Time Series Phase Space Reconstruction

In the paper, we choose the opening quotation of Hang Sheng Index (HIS) (4067

points from 31 December 1986 to 16 June 2003), Shanghai Stock Index (2729 points

from 19 December 1990 to 29 January 2001), and US gold price (7277 points from 2

January 1975 to 8 August 2003) as the experiment data. The three sets of time series

are shown in Fig.1.

(a)

(b)

(c)

Fig. 1. (a) Opening quotation of Hang Sheng Index (b) Opening quotation of Shanghai Stock

Index (c) Opening quotation of US gold price.

From Fig.1 we can observe that in the time series curves some locals have similarity with the whole. For showing the complexity of the three sets economic data, we

compute their box dimensions [13]. The box dimension, which always is used to calculate the dimension of the continuous curve, is a kind of fractal dimension. They are

shown in Table 1.

According to the theory in the literature [14], if the capital market follows the random walk, the box dimension should be 1.5. The time series whose box dimension is

between 1 and 1.5 is called long range correlation fractal time series, which means

that the past increment is positive correlative with the future increment. The time

1259

series whose box dimension is between 1.5 and 2 is called long range negative correlation fractal time series, which means that the past increment is negative correlative

with the future increment. From the Table 1, we can observe that the box dimensions

are all between 1 and 1.5, so the financial time series dont follow the random walk

entirely, and that there is long range positive correlation in them.

Box dimension

HIS

1.16016

1.16631

US gold price

1.18816

We reconstruct the phase space by calculating the embedding dimension m and the

delay time with the prediction error minimizing method [15].

At the same time, we choose three dimensions data from the every m -dimension

reconstructed phase space of the financial time series and plot them which are shown

in Fig.2.

(a)

(b)

(c)

Fig. 2. The 3 dimensions data from the reconstructed phase space of the financial time series (a)

the opening quotation of Hang Sheng: 1-dimension, 9-dimension and 17dimension (b) the

opening quotation of Shanghai Stock Index:1-dimension, 10-dimension and 19dimension (c)

the opening quotation of US gold price:1-dimension, 10-dimension and 19dimension

The maximum Lyapunov exponent max is computed with the small data sets

method [16] to prove that these financial time series are chaotic. A quantitative measure for the sensitive dependence on the initial conditions is the Lyapunov exponent,

which characterizes the average divergence rate of two neighboring trajectories.

It is not necessary to calculate Lyapunove spectrum because a bounded time series

with a positive maximum Lyapunove exponent indicates chaos. Moreover, the maximum Lyapunov exponent gives an estimate of the level of chaos in the underlying

dynamical system. From Table 2 we can found the maximum Lyapunov exponents

are positive, so the financial time series are chaotic.

The chaotic systems are sensitive to the initial values, so the chaotic time series has

limited prediction potential. Since the maximum Lyapunove exponent characterizes

the average degree of neighboring orbits, its reciprocal 1 max determines the maximum

predictable time. The results are all shown in Table 2.

1260

C. Feng et al.

Table 2. The chaotic analyse of the financial time series.

dimension

exponent

time

HSI

17

6

0.069

14

Shanghai Stock Index

19

4

0.029

30

US gold price

19

7

0.046

20

The architecture of the feedforward neural networks used in this lecture is

m : 2m : m : 1 , where m is the embedding dimension. The topology architecture is shown

in Fig.3.

When the m dimension training set is put into the networks, each hidden unit j in

the first hidden layer receives a net input

j = w ji xi

(4)

V j = tanh( j ) = tanh( w ji x i )

i

(5)

where w ji represents the connection weight between the i th input unit and the j th

hidden unit in the first layer. Following the same procedure for the other unit in the

next layers, the final output is then given by

j

l

i

(6)

1261

where the hyperbolic tangent activation function is chosen for all hidden unit, and the

linear function for the final output unit.

The weights are determined by presenting the networks with the training set and

comparing the output of the networks with the real value of the time series. The function of the weights adjusting is

old

wqtnew = w qt

w qt

(7)

where wqt = E ( wqt ) wqt , E ( wqt ) is the mean square error function, 0 < 1 is the learn

rate, and 0 < < 1 is the inertial term. By setting the delay coordinates of the time series x(t ) : ( x(t ), x(t ),L, x(t (m 1) ) as the input pattern and choosing x (t + ) as the

know target, the networks can be trained to predict the future state of the system at a

time , which corresponds to a certain number of time steps [10].

4.1 Method of Choosing Training Set

In the above feedfoward neural networks prediction the input data and the target

should be known, but it is impossible to know the target in reality, therefore this prediction is only a systemic simulation. At the same time the literature [10] didnt mention how to choose the training set, thus the choice of the training set has some uncertainty. So if we want to predict the time series authentically, we should choose the

training set whose characters are similar with the prediction sets, and use the weights

getting from the training sets exercitation to forecast the prediction set. So how to

choose the training set became an important problem. We solve this problem in this

section.

In the second section we proved the three sets of the financial time series are chaotic time series, so we put forward a new method to choose the training by using the

correlation dimension as the criterion. The correlation dimension is a kind of fractal

dimension that can depict the chaotic characteristic. The notion of dimension often

refers to the degree of complexity of a system expressed by the minimum number of

variables that is needed to replicate it.

The steps of how to choose the training set are shown as follows.

1)

2)

3)

4)

5)

Calculating correlation dimension of the prediction set.

Choosing 50 sets which are closest to the prediction set.

Computing every sets correlation dimension.

Choosing the set whose correlation dimension is nearest to the prediction sets as

the training set.

Then use this training set to train the networks, and get the weights. We can adopt

these weights to forecast the prediction set.

1262

C. Feng et al.

The G-P algorithm which was presented by Grassberger and Procaccia is adopted to

calculate correlation dimension [17].

For a set of the space points {Yi } , defining

C N (r) =

where ( x ) = 0,

1,

x0

x>0

2

( r Y i Y j ),

N ( N 1) 1 i < j N

(8)

When we choose different r , we can get different C N (r ) . In estimating the correlation dimension from the data, one plots log C N ( r ) against log( r ) , where N is the cardinality of the data set. C N (r ) measures the fraction of the total number of pairs

(Yi , Y j ) such that the distance between Yi and Y j not longer than r .

5 Experiments

From the embedding dimensions in the Table 2 we can determine the neural networks architecture, for Shanghai Stock Index the architecture is 19:38:19:1, for HSI

the architecture is 17:34:17:1, for US gold price the architecture is 19:38:19:1.

(a)

(b)

(c)

Fig. 4. Fitting curves of prediction sets CD and the Training sets CD (a) the opening quotation

of Hang Sheng Index (b) the opening quotation of Shanghai Stock Index (c) the opening quotation of US gold price

Based on the three phase spaces with the financial time series, we choose 100 continuous points in the every phase space as the prediction set. Using the method expatiated in the forth section we determine the training set. The correlation dimensions of

the prediction set and training set are listed in Table 3.

Fig.4 shows the fitting curves of prediction sets CD and the Training sets CD.

From Table 3 and Fig.4 we can observe for every set of the financial time series that

the training sets correlation dimensions are near to the prediction sets, and their

fitting curves are parallel. So in the next step we use these three training sets to train

the networks.

1263

Table 3. The correlation dimension comparison between the predicting set data and training

data

Predicting set CD

Training sets CD

CDs difference

HIS

1.9113

2.1078

0.0965

2.3979

2.3276

-0.0703

US gold price

2.7269

2.7936

0.0667

By educating the every training set in the networks, we obtained the weights one

by one. Put the prediction set into the networks whose weights have been determined,

and the predicted data are calculated. The three sets of the predicted results and the

real values are shown in Fig.5.

(a)

(b)

(c)

Fig. 5. The prediction of the financial time series (a) the opening quotation of Hang Sheng

Index from 2 April 2002 to 22 April 2002 (b) the opening quotation of Shanghai Stock Index

from 21 October 1996 to 11 November 1996 (c) the opening quotation of US gold price from 8

September to 5 October 1995

We also calculate the mean absolute percentage error (MAPE) displayed in Table 4

to show the prediction effect.

n

MAPE =

x

t =1

xt' xt

(9)

Table 4. The MAPE between the real data and the predicted data

MAPE

HIS

1.9%

3.9%

US gold price

0.46%

Every MAPE is less than 5%, so the prediction effect is good enough.

6 Conclusions

Though the experiment results, we can find that the predicted datas trend is identical

with the real datas on the whole except few exceptional points and the MAPE be-

1264

C. Feng et al.

tween the real data and the predicted data are all small. This proved that as the chaotic

time series, the financial time series can be predicted by the feedforward neural networks.

On the other hand, we also can prove that the method which is adopted to choose

the training set by using the correlation dimension as the criterion is effective from

the experiment results. When we predict the chaotic financial time series using this

method, the uncertainty of the training sets choice is reduced.

Acknowledgements

The National 863 Natural Science Foundation of P. R. China

fully supported this research.

2001AA635010

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