Application and analysis of forecasting stock price index based on combination

of ARIMA model and BP neural network

Yulin Du1,2
1. School of Management ,Fudan University ,Shanghai,China,200433
E-mail: tongjihz@sina.com
2. Department of Finance, East China University of Political and Science of Law, Shanghai,201620

Abstract: Stock price index is a barometer of the national economy, which often shows strong nonlinearity because of
various factors. It is necessary to use nonlinear models to improve the accuracy of prediction. We predict Shanghai
Securities Composition stock index with ARIMA-BP neural network method, and compare the accuracy with the result
of single ARIMA model and BP neural network method. We find that the prediction accuracy of ARIMA-BP neural
network is better than the BP neural network, BP neural network is better than linear model ARIMA, which confirms the
change of stock price index is nonlinear.
Key Words: BP neural network; Shanghai Securities Composition stock index; ARIMA-BP; Foresting

1 INTRODUCTION 2 ARIMA-BP NEURAL NETWORK MODEL

Stock market forecasting is a branch of economic
forecasting. Whether the future trend of stock market price
can be predicted is closely related to the effectiveness of the
financial market. If the stock market is in line with the
effective market hypothesis, which means the stock price
follows random walk model, the prediction of the stock
price is meaningless. With the development of China's
securities market, many scholars are devoted into the study
of the validity and predictability of China stock market.
From the research on the characteristics of China's stock
market, most researchers believe that China's stock market
has not yet reached the weak and effective market,which
means that the historical information of stock trading will
help to predict its future price . In the short term, the stock
price is predictability, so is the stock price index. Now more
and more people are investing in securities. The influence of
the operation of stock market on China's real economy is
deepening. It is playing the role of "barometer" and "alarm"
in the national economy. It is of great significance in
understanding of the stock market rules, analysis and
prediction of the future stock price index to investors and
regulators.
However, there are many factors affecting the change of
the stock price index, the stock price index has noisy and
highly nonlinear fuzzy characteristics .It is hard to predict
the future index through a simple model. Many scholars
have given different forecasting methods, such as time
series prediction, grey forecasting, combination forecasting.
But the stock index the fluctuation is easily affected by
short-term factors,it is hard to catch the behavior of the
stock price index using a single model. In this paper ,we
predict the future stock price index through ARIMA-BP
neural network method to improve the prediction accuracy.
This work is supported by National Nature Science Foundation under
Grant 71371054
There are many kinds of methods to forecast the stock
index, which can be divided into linear and nonlinear
models .In order to make comparison, we select ARIMA
(p,d, q) to represent the linear model , BP neural network
mode representing the nonlinear method ,we then combine
these two models into ARIMA-BP neural network to
improve the predction accuracy.
2.1 Linear model :ARIMA
Stock price index data is usually collected in
chronological order. It can be regarded as time series data. It
has significant nonlinear and time-varying characteristics.
There are many research on stock market prediction ,
putting forward many prediction methods. Autoregressive
Integrating Moving Average (ARIMA) is quite flexible in
time series analysis, which combines the advantages of time
series and regression analysis. It is widely used in stock
application and prediction.
For time series yt ,{t = 1, 2,3, ", n} , the modeling
process of ARIMA is as follows:
(1)Stabilizing the time series
The stock price index is generally a nonstationary time
series, it needs to be stabilized by the difference method,
that is:
∇ d yt = zt
Where d is the number of differences, for stock price
index, d is often equal to d=1.
(2) Establishing ARMA model
The ARMA (p, d, q) model is established for the result of
the difference:
ϕ ( B )(1 − B ) d yt = ψ ( B )ε t
p q
ϕ ( B)=1-¦ α i B i ˈψ ( B)=1-¦ β i B i
i =1 i =1
Where B is the lagged operator.

978-1-5386-1243-9/18/$31.00 2018
c IEEE 2854
 (3) Determining the parameters of the model and testing
the regression model
P and q are the key parameters in ARMA (p, q)
model.According to the AR (p), MA (q) model, we can use
the autocorrelation and partial autocorrelation function to
estimate p and q values of the stock price index by
comparing the minimum information criterion (AIC) and
consistency criterion (SC) to determine the optimal number
of model order. At the same time, the coefficient, equation
and residual error of the model should be tested.
(4)Prediction through the model
After the model is determined, the data outside the
sample are extrapolated and predicted.There are two kinds
of prediction methods: dynamic prediction and static
prediction. Dynamic prediction is based on the data of the
first observation value, so the prediction is not very accurate.
Generally, it uses the static prediction method, which can
get better prediction by using the real value of the original
time series.
2.2 Nonlinear model :BP neural network
In ARIMA model, we assume that the stock price
index follows a linear system. However, the stock price
index is nonlinear and time-varying. Therefore, the
prediction result of ARIMA is not ideal. A single prediction
model can only reflect the stock price index segment
information, it is difficult to fully change the stock price
data mining rules hidden in the prediction results and the
requirements of investors, investors have a certain gap,
combination model to great extent to the comprehensive use
of various models to provide information as much as
possible to improve the prediction accuracy, especially in
the economic, management and statistical research and all
kinds of combination forecasting method has been
improved and an important way to improve the forecast
accuracy.
BP (Back Propagation) network is a multilayer feed
forward neural network, the network training, adjust the
training algorithm right threshold follows the error
back-propagation method. Usually the BP neural network
has 3 layers or 3 layers these neurons, including input layer,
hidden layer and output layer, realize the connection
between the upper and lower layer, and the same neuron
connection. The input layer neurons and neurons in the
hidden layer and hidden layer between neurons and neurons
in the output layer is the network weights, the connection
strength between two neurons in the hidden layer. When a
pair of learning is provided to the input neurons, neuronal
activation values from the input layer through the hidden
layer to the output layer, then according to reduce the error
between the network output and the actual output samples
from the output layer direction, reverse direction through a
hidden layer to the input layer, so as to gradually modify the
connection weights, the algorithm is called "the error
back-propagation algorithm" or "negative gradient
correction algorithm".
The 30th Chinese Control and Decision Conference (2018 CCDC)
Input layer Hidden layer Output layer
Figure 1 The structure of BP neural network
X 1 , X 2 , " , X n is the BP neural network input value,
Y1 , Y2 , ", Yn is to predict the value of the BP neural network,
ωij , ω jk are the weights of the neural network. BP neural
network can be regarded as a nonlinear function, the
network input and output respectively the function of the
independent and dependent variables, as the network input
nodes and output nodes are respectively n, m, which reflects
a variable from the n to m because of the mapping function
variables in BP neural network.
2.3 ARIMA-BP neural network method
The ARIMA-BP model is the synthesis of two kinds of
models, which regard the residuals of the ARIMA model as
the input parameters of the BP neural network model, then
pulsing them together to get the final result, the result will be
more accurate than the single ARIMA model and the BP
neural network model result.
3 DATA AND EMPIRICAL ANALYSIS
3.1 Data
We select Shanghai securities composition index
represent the stock price index, we choose the closing price
data from January 3, 2017 to December 22, 2017. A total of
240 data samples were collected, of which the first 200 data
were used as training set to model stock closing price index.
To avoid the chance of single sample prediction, the last 40
samples are used as test sets tocheck the prediction ability
of the model. The closing price of Shanghai securities
composite index is shown in the figure 2.
3,500
3,400
3,300
3,200
3,100
3,000
25 50 75 100 125 150 175 200 225
Figure 2 The line graph of Shanghai securities
composite index
3.2 The establishment and prediction of the linear model
In ARIMA (p,d, q) ,threr are three parameters to be
determined in the model. p is the order of AR(p) model,
2855
 we can get p through the partial autocorrelation coefficient be choosen from ARIMA˄1,1,1˅,ARIMA˄2,1,1˅ARIMA
of the series; q is the number of order moving average, ˄1,1,2˅.Finally we choose model by comparing their
which can be obtained through the auto regression function; values of the SC and BIC criteria.
d is the order of a single integration , obtained from the unit Table 2 The BIC and SC criteria value of models
root test. Three parameters in the ARIMA model and other
models is obtained from EViews9 and Matlab2014. BIC SC
3.2.1 Unit root test
ARIMA(1ˈ1ˈ1) -5.346911 -5.323679
We use ADF to test the series of Shanghai composite
index(SH) and its first difference , we get the following ARIMA(2ˈ1ˈ1) -5.367165 -5.357804
results: ARIMA(1ˈ1ˈ2) -5.358152 -5.336381
Table 1 The results of unit root test
From the results, we see that the SC and BIC values of
Time series Statistic p-Value Critical Value
ARIMA(2,1,1) model are the smallest. Therefore ARIMA
SH -2.48 0.1169 -3.99293˄1%˅ (2, 1, 1) model is the best model. We choose this model to
First predict the out of sample data.
-15.8*** 0.0001 -3.13293˄10%˅ 3.2.3 Out of sample prediction
difference
From the table ,we see that the Shanghai composite We will use ARIMA (2, 1, 1) to predict the out of
index is not stable, but the first order difference becomes sample data of Shanghai composite index using one step
stable, the Shanghai index is I(1), so the parameter d=1. prediction . The first I moments of the stock price, using the
3.2.2 Auto correlation function and partial I - 1 data as learning samples in the model training, the
autocorrelation function diagram follow-up data shall not participate in the training in the
According to the theory of time series, the partial prediction modeling. The prediction results of the ARIMA
autocorrelation coefficient of AR (p) mode truncated at p model are shown in Figure 5. From Figure 5, we can see that
order; autocorrelation coefficient of MA (q) truncated at q the prediction accuracy of ARIMA model to stock price
Order. So we can get p and q values from the partial index is not high, but we can grasp the trend of stock price
correlation and autocorrelation function image.The well, that is, we get the linear part information of stock price
Shanghai composite index and partial autocorrelation index.
autocorrelation function the number of images are as
follows:

Figure 5 The prediction result of ARIMA model

Figure 3 Auto correlation coefficient and partial
autocorrelation coefficient diagram of SH series 3.3 Prediction based on BP neural network model
We use a single BP neural network to predict the stock
price index. The results are shown in Figure 6. From Figure
6, it can be seen that the prediction accuracy of the single BP
neural network model is not high.Iit is difficult to describe
the change of stock price in a comprehensive and accurate
way.

Figure 4 Auto correlation coefficient and partial

autocorrelation coefficient diagram of the first difference of
SH series
From the above autocorrelation and partial
autocorrelation coefficients, we can see that our model can Figure 6 The prediction result of BP neural network

2856 The 30th Chinese Control and Decision Conference (2018 CCDC)
3.4 Prediction based on ARIMA-BP neural network
model
According to ARIMA (2, 1, 1) the prediction results ,the
actual stock price index is worth to the residual sequence of
stock price index. We use it as the desired output of the BP
neural network, then reconstruce the original data of the
phase space for the optimal order of the reconstructed data
as BP input. We then train the input to the BP neural
network for learning modeling, and the residual sequence
test set was predicted by ARIMA (2,1, 1) residual sequence
prediction. At the same time, the prediction results of
ARIMA (2, 1, 1) and BP neural network model are added to
get the final prediction result of the stock price index. The
prediction results are shown in Figure 7.
Figure 7 The prediction result of ARIMA-BP neural
network
3.5 Comparison of the three models
In order to verify the predictive ability of the three
models, we measure the predictive effect of the three models
by means of the root mean square error and the relative
mean error. The mean square error is the expected value of
the square of the difference between the parameter
estimation and the true value of the parameter ( Root Mean
Squared Error, RMSE).
1 [4]Jensen H L Using neural networks for credit scoring[J]
RM SE = ¦ (yˆ i − y i ) 2
n i
The mean relative error is better to reflect the actual
situation of the prediction error because it has no
dimensional influence, it is a percentage easy to make
comparison.
1 ŷ i − y i 2
MRE = ¦( ) the Interdisciplinary Journal of Nonlinear Science &
n i yi
Table 3 The MRE and RMSE of three models
Method MRE RMSE
ARIMA 7.45% 89.21
BP 5.61% 65.73
ARIMA-BP 1.03% 18.02
From the result of the model , RMSE and MRE results
of ARIMA-BP is the smallest among the three kinds of
models, the results of the BP model is in the middle, the
worst is the results of ARIMA, so ARIMA-BP's stock price
prediction accuracy is much higher than that of single
ARIMA and BP neural network, the prediction accuracy of
The 30th Chinese Control and Decision Conference (2018 CCDC)
the model, the BP neural network model results the result is
better than the ARIMA model, the stock price index has
obvious non-linear characteristics. The comparison results
show that ARIMA-BP has made full use of the advantages
of ARIMA and BP neural network to achieve
complementary advantages, overcome both defects, and
comprehensively depict the change rule of stock price index.
ARIMA-BP neural network model is an effective prediction
method of stock price index.
4 CONCLUSIONS
Because there are more and more uncertainty in financial
market, it is hard to use a single model to predict stock price
index. We predict Shanghai stock index with ARIMA-BP
neural network method, and compare the accuracy with the
result of ARIMA model and BP neural network method
along. We find that the prediction accuracy of ARIMA-BP
neural network is better than the BP neural network, BP
neural network is better than linear model ARIMA, which
confirms the change of stock price index is nonlinear.
REFERENCES
[1]Albanis George,Batchelor Roy.Five classification
algorithm to predict high performance stocks[M] .Kluw er
AcademicPublishers, 2000(3): 1-30.
[2]Bhattacharya A, Abraham A, Grosan C, et al.
Meta-Learning Evolutionary Artificial Neural Network for
Selecting Flexible Manufacturing Systems[C] Advances in
Neural Networks - Isnn 2006, Third International
Symposium on Neural Networks, Chengdu, Proceedings.
DBLP, 2006:891-897.
[3]Guresen E, Kayakutlu G, Daim T U. Using artificial
neural network models in stock market index prediction[J].
Expert Systems with Applications,
2011,38(8):10389-10397.
Managerial Finance,1992,(6):15-26.
[5]Majhi R, Panda G, Sahoo G, etal. Stock market
prediction of S&P 500 and DJIA using Bacterial Foraging
Optimization Technique[C] Evolutionary Computation,
IEEE, 2007:2569-2575.
[6]Qiu M, Song Y, Akagi F. Application of artificial neural
network for the prediction of stock market returns: The case
of the Japanese stock market[J]. Chaos Solitons & Fractals
Nonequilibrium & Complex Phenomena, 2016,
85(September):1-7
[7]Rather, Agarwal , Sastry. Recurrent neural network and
a hybrid model for prediction of stock returns. Expert
Systems with Applications[J] , 2015 , 42 (6) :3234-3241.
[8]Vanstone BˈFinnie G.An empirical methodology for
developing stock market trading systems using artificial
neural networks[J].Expert Systems with
Applications,2009,36(3):6668-6680.
2857