1069737.stock Market Analysis and Price Prediction

11th International Odyssey Conference on Economics and Business, Šibenik, Croatia - June 16-20, 2020
STOCK MARKET ANALYSIS AND PRICE PREDICTION

USING DEEP LEARNING AND ARTIFICIAL NEURAL
NETWORKS
Tomislav MEDIĆ
University of Zagreb, Faculty of Economics & Business – Zagreb, Department of Informatics
Trg J.F.Kennedyja 6, 10000 Zagreb, Croatia
E-mail address: tmedic@net.efzg.hr
Mirjana PEJIĆ BACH

E-mail address: mpejic@efzg.hr
Božidar JAKOVIĆ
E-mail address: bjakovic@efzg.hr
Abstract
This paper aims to present a deep learning and artificial neural network application in the
field of stock market trading, specifically, in the analysis and forecasting of the stock market
prices as an additional tool to reduce risk and increase profits. The goal of the paper is to
introduce a new form of technology, show its potential, and encourage further research into
this subject in Republic of Croatia. To achieve this goal and to present the potential of this
technology, two different artificial neural network prototypes were built, trained, and tested
on the available set of historical stock price data from the Zagreb Stock Exchange. Two
artificial networks were build using Python programming language: Long Short-Term
Memory (LSTM) network and Multilayer Perceptron (MLP) network. Both artificial neural
networks were built and the data sets they were trained and tested on were taken from the
Zagreb Stock Exchange, containing historical stock prices of Croatian telecommunication
companies, Optima Telekom (OPTE), and Hrvatski Telekom (HT). The results, i.e. price
predictions, of both neural networks are presented in two parts. First, for OPTE stock prices
and then for HT stock prices.
Keywords
Artificial intelligence, deep learning, artificial neural networks, stock market trading, stock
prices, Republic of Croatia
JEL classification
C45 – Neural Networks and Related Topics; C53 – Forecasting and Prediction Methods,
Simulation Methods; G11 – Portfolio Choice, Investment Decisions
1. Introduction
The analysis involves a careful study of the available facts with an attempt to draw
conclusions based on established principles and sound logic. It is part of the scientific method.
However, in the application of securities analysis, we encounter a serious obstacle since
investing by nature is not an exact science (Graham & Dodd, 2008). Therefore, various
approaches are used and tested in the area of analysis and predicting stock market changes.
Deep learning is a subclass of machine learning, and today it is the front-runner of machine
learning methods and is used in many branches of human life and modern-day society. Many
companies have discovered its effectiveness and are actively investing and developing deep
learning architectures to increase competitiveness. Some examples of deep learning
applications can be found in web searches, e-commerce website recommendation systems,
content filtering on social networks, smartphone applications such as artificial intelligence
cameras. Deep learning is also used for computer vision, pattern recognition, natural language
processing, etc. (LeCun, Bengio, & Hinton, 2015.). Most deep learning methods include the
use of an artificial neural network.
This paper aims to present a new approach to stock market analysis using artificial
intelligence, i.e. deep learning, as one of the fastest-growing technologies today, and to
explore its potential in predicting future stock prices. Both a theoretical basis for the
application of this model will be presented, as well as a practical example in a form of an
artificial neural network, which will analyze historical data and predict future stock prices.
The main research question of this paper is “Can artificial intelligence, i.e. deep learning
model, successfully predict future price movements?”.
To achieve the goal of this paper, two different artificial neural networks were built,
Multilayer Perceptron (MLP) and Long Short-term Memory (LSTM) neural network. Both
networks were built using Python programming language and its libraries. Stock prices used
for training and testing the artificial neural networks were taken from the Zagreb Stock
Exchange, and are those of Croatian telecommunication companies, Optima Telekom (OPTE)
and Hrvatski Telekom (HT) for the period from January 1, 2015. Until January 1, 2020.
After the introduction, the second part of the paper cover similar research involving artificial
neural networks. The third part of the paper presents the methodology used in this paper.
Results of the utilized artificial neural networks on the datasets from the Zagreb Stock
Exchange are presented in the fourth part, and concluding remarks are presented in the final
part of the paper.
2. Literature review
There is a long history of studying securities, and to this day, it has become a separate
scientific discipline, which we call the investors to approach, investment analysis, portfolio
management, etc. (Orsag, 2015). Stock market predictability and tools to increase investment
effectiveness have a long history of research and study. While opinions on the subject differ,
many empirical studies do show that financial markets, i.e. stock markets, are somewhat
predictable.
Security analysis can be divided into two basic directions: fundamental and technical analysis.
In terms of security analysis and efficient investment, the fundamental analysis includes
analysis of entire industries, or individual industries, international industrial trends, inflation,
and the like. In the analysis of joint-stock companies, their operations are analyzed based on
publicly available financial statements and other public information relevant to their
operations. In doing so, various standardized indicators are used, which are publicly available
and are monitored continuously. The main goal of fundamental analysis is, based on various
indicators, to determine which factors affect a particular price of a security, and to identify
those securities that are overvalued or undervalued to achieve a return. Technical analysis is
used in the analysis of various conditions in the capital market, such as price changes,
exchange volume, supply, and demand, etc. All of these terms are graphically displayed and
processed to find the best time to act, be it buying or selling. Capital market indicators such as
Dow Jones Industrial Averages, S&P 500 Index (Standard & Poors), NASDAQ, etc. are also
used.
Deep learning based on usage of neural network emerged recently as the novel approach to
the security analysis, with various applications. Deep learning is a subset of machine learning,
as machine learning is a subset of artificial intelligence. Deep learning represents a new
approach to learning from data that is based on concluding successive layers of increasingly
meaningful representations (Chollet, 2018). The number of layers in a certain model
represents its depth. Some machine learning approaches (and earlier neural networks) tend to
contain only one or two layers of representations of the data and are commonly known as
shallow learning models. Deep learning, on the other hand, at least modern versions of it, use
tens or even hundreds of layers of representations and are almost always represented by a
model called artificial neural network (Chollet, 2018).
Artificial neural networks are often compared to a human brain, hence the name neural
network. However, despite some similarities with the human brain, and concepts that were
introduced to the development of artificial neural networks based on scientific understanding
of a human brain, deep learning models, i.e. artificial neural networks, are not models of the
brain and are not modeled after the brain. They are a programmed mathematical framework
designed for learning representations and discovering patterns in data (Chollet, 2018).
Artificial neural networks are often used for security analysis. For example, Chong, Han, &
Park (2017) proposed a model for stock market prediction using data from the Korean stock
market, and compared its results to established linear autoregressive models and have found
that deep learning models have outperformed the linear models in the training set. However,
they’ve also concluded that the advantage drastically lowers in the testing phase.
Hiransha, Gopalakrishnan, Menon, & Soman (2018) also tested artificial neural networks on
the New York Stock Exchange and compared its efficiency with ARIMA linear model. They
have found that Convolutional neural network (CNN) outperformed the other types of neural
networks used in the research, and have also observed that the neural networks outperformed
the ARIMA linear model in price prediction.
Selvin, R, Gopalakrishnan, Menon, & Soman (2017) also proposed a deep learning
technology for stock price prediction and have found that the proposed system was capable of
identifying patterns within the data, and have also found that CNN networks were capable of
capturing changes in trends. They have trained the model on Infosys stock prices and were
able to predict future stock prices for Infosys, TCS, and Cipla, once again proving the
potential of deep learning technology.
Nelson, Pereira, & de Oliveira (2017) built an LSTM prediction model and tested it through a
series of experiments. Their results show promise, as the neural network was getting more
than 55% accuracy when predicting a rise or fall of a certain stock.
Many more papers have covered the use of deep learning models in some form of prediction,
most of which have concluded that artificial neural networks have great potential and a large
field of application. Besides, this technology hasn't yet reached its peak. It is still being
developed, and new architectures and fields of application are still being discovered almost
daily.
3. Methodology
3.1. Data
The data for the analysis were taken from the Zagreb Stock Exchange website, and they
include the historical prices of Optima Telekom shares (OPTE), and Hrvatski Telekom shares
(HT). OPTE and HT are Croatian companies based in Zagreb, and both are providers of
telecommunication services. As such they are listed on the Zagreb Stock Exchange as part of
the “Telecommunications” sector.
The downloaded data sets contain daily data on the starting price, highest price, lowest price,
closing price, average share price, quantity, and the number of transactions, all from 1 January
2015. to 1 January 2020.
Both data sets were divided into training data (80%) and testing data (20%). The first 80% of
the data will be used to train neural networks, and the last 20% of the values in the data sets
will be used to test each network and will serve as a measure of neural network performance.
The movement of prices of both shares is shown for the period from 1 January 2015 to 1
January 2020 (Figure 1).
Figure 1: Historical data of OPTE and HT shares (1.1.2015-1.1.2020)
Source: Authors’ work
3.2. Research methods
Since the use of deep learning models, i.e. artificial neural networks, is an extremely complex
process, which requires significant investment, knowledge and time to build, train and test,
the aim of this paper is to present two simple models of artificial neural networks as an
example of deep learning in the area of predicting future movements, in this case of stock
prices.
As previously mentioned, there are several types of artificial neural networks that can accept
different data to solve different tasks. In this paper, simple Multilayer Perceptron (MLP) and
Long Short-term Memory (LSTM) neural networks, created using Python programming
language and its packages (keras, tensorflow, etc.), were built and used. The results are
presented using the numpy and matplotlib packages.
The subject of the paper is the comparison of actual prices of OPTE and HT shares with the
prices predicted by the neural network models (last 20% of data – testing data). It is important
to emphasize that these models are just a simple representation of the principle by which
artificial neural networks operate. For further in-depth analysis and more accurate, i.e.
reliable, predictions, it would be necessary to program a more complete neural network that
would take many more factors into account and which should be trained in several phases
with different data.
This paper does not advocate replacing the existing analyses but rather complement them to
increase efficiency. The application of simpler neural networks is more in line with technical
analysis since the conditions and indices observed through technical analysis are much easier
to record, acquire, and load into the neural network. Such is the case with the models in this
paper. The downloaded data set contains data on the closing price of shares from the Zagreb
Stock Exchange, which is enough for these neural networks to make simple forecasts. In
fundamental analysis, data collection would be somewhat more difficult, but not impossible.
As a part of building working neural network models, the available data was standardized
using the MinMaxScaler package from the sklearn.preprocessing Python module. The data
was then divided into training and testing data. 80% of data was used for training and the rest
was used for testing the models.
Both neural networks were built using a Sequential model which is a part of Keras Python
library. To verify the results given by neural network models, we used mean squared error.
Neural networks were trained over 100 epochs, in batch size of 33, using MSE as a measure
of quality and Adam as the optimizer. Adam is an optimization algorithm commonly used to
train deep learning models.
The training was completed successfully with a reported MSE of 0.0016 for LSTM network,
and 0.0013 for MLP network. The results of testing the models can be found below.
4. Results
As previously stated, two different neural network architectures, MLP, and LSTM were used
to analyze and predict stock prices, and the results of these two models are presented in this
chapter.
4.1. Stock price prediction with MLP network

Multilayer Perceptron is a fairly simple (compared to other neural networks) neural network
architecture. However, the simplicity does not hinder its ability to accurately predict future
movements. MLP is a commonly used artificial neural network that is being used in multiple
fields. For example, Colombet, Ruelland, Chatellier, Gueyffier, Degoulet, & Jaulent (2000)
used a MLP model to predict cardiovascular risk, and Lee & Choeh (2014) used MLP to
predict helpfulness of online reviews.
Even using a relatively simple neural network that is MLP, when predicting future price
movements of HT and OPTE stocks, we can notice the efficiency and potential of deep
learning technology. Based on historical stock prices – marked in red – the MLP neural
network was able to predict stock price movements to some extent, as is visible by the blue
line in Figure 2.
Figure 2: OPTE stock price prediction using MLP network

We can view the results in more detail when we enlarge the graph (Figure 3). We can observe
that the MLP network, at several time points, has successfully predicted the prices of OPTE
shares. For example, for the time interval 50-100, it can be observed that MLP predicted
relative price stagnation with a slight short-term decline, followed by a sharp increase present
in the time interval 100. The success of the forecast is visible throughout the testing data,
however, at several time points, the network failed to accurately predict price movements
(e.g., time intervals 150, 170, and 220). These deviations could be somewhat corrected by
further adjustment of the MLP model (weight correction), or by additional training and
optimization of the MLP neural network.
Figure 3: Comparison of actual and predicted OPTE stock prices using MLP

A similar degree of accuracy can be observed for the HT stock price data set. The MLP
network once again predicted the stock price movements, highlighted in blue in Figure 4.
Figure 4: HT stock price prediction using MLP network

In Figure 5, when we study the graph in more detail, once again we can observe that the
network predicted the price movements and at several time points captured the exact stock
price. However, at several time intervals it did not successfully predict HT stock prices (e.g.
time intervals 50, 70, 100, etc.).
Figure 5: Comparison of actual and predicted HT stock prices using MLP

Even though the network was not perfectly accurate, MLP network successfully predicted a
decline in stock prices (time interval 100), and then an increase (time interval 120), as well as
an increase in stock prices for the time interval 190-210. At time points the network was able
to predict HT stock prices perfectly (e.g. time intervals 60, 120, 130, etc.).
4.2. Stock price prediction with LSTM network

LSTM neural network is one of the youngest neural network architectures which is popularly
used for time series prediction, classification, and processing because of its ability to “learn”
long-term dependencies. An example would be using an LSTM network to predict real-time
traffic flow (Fu, Zhang, & Li, 2016). Fu, Zhang, & Li used LSTM model to predict traffic
flow because existing models such as ARMA and ARIMA couldn’t capture the nonlinear
nature of traffic flow. Similarly, Duan, L.V., & Wang (2016) used an LSTM neural network
to predict travel time. LSTM neural networks show promising results in time series prediction
which can also be seen in this paper.
The LSTM network has proven to be extremely effective using a simple model built with
Keras package of the Python environment. The first graph (Figure 6) shows the actual price
movement from 2015 to 2020 (red line) and the predicted prices given by the LSTM network
on the testing data (blue line). From the graph, it can be seen that the network noticed and
predicted the movement of OPTE stock prices. Of course, this model needs to be further
tested on future stock price data to establish its real efficiency and usefulness in stock market
analysis and investment.
Figure 6: OPTE stock price prediction using LSTM network

When the graph is enlarged and we study the results in more detail (Figure 8), we can observe
that, although the neural network mostly did not perfectly estimate the exact stock prices, it
predicted the actual price movement. The network predicted the fall and rise of prices (time
points 100, 110, 150, etc.), and at certain time intervals perfectly accurately predicted the
price of OPTE shares (time points 90, 105, 110, etc.).
Figure 7: Comparison of actual and predicted OPTE stock prices using LSTM

We can also notice that the accuracy of the LSTM network decreases over time, which can be
mitigated to some extent by optimizing the LSTM model. If we compare MLP and LSTM
models in this paper, we will notice that the MLP network gave more accurate predictions for
OPTE stock prices. However, the LSTM network is a more complex and more advanced
model of an artificial neural network, which with further optimization and development would
produce significantly better results. Nevertheless, even with these simple models, we can
discern the potential of deep learning, i.e. artificial neural networks.
For the results of the LSTM network, in case of HT stock prices, we can observe slightly
better, more accurate results. The LSTM network again managed to predict the overall stock
price movement (Figure 9).
Figure 8: HT stock price prediction using LSTM network

When we look at the graph more closely (Figure 10), we can see that the LSTM network
successfully predicted the rise and fall of stocks (e.g. time interval 100-110) and that the
accuracy of the network remained the same over time. We can also notice that the LSTM
network at several time points perfectly predicted the price of HT stocks (e.g. time points 60,
80, 135, etc.). However, at some time points it has failed to predict the prices accurately (e.g.
time points 45, 105, 190, etc.).
Figure 9: Comparison of actual and predicted HT stock prices using LSTM
5. Discussion
This paper, and similar research done in the past, can give a clear answer to the question
stated at the beginning of this paper: “Can artificial intelligence, i.e. deep learning model,
successfully predict future price movements?”. The answer is yes, yes it can. However, an
artificial neural network (or any other artificial intelligence model) will never be able to
predict price movements 100% of the time. It can, however, reduce risk and increase
efficiency of analyses that are currently used for stock market trading and price prediction.
This has been proven many times. Even though artificial neural networks have just recently
been developed to a point they can be effectively used for time series prediction (and other
tasks), the field of deep learning models has been a part of the scientific research for a much
longer time. For example, Kimoto, Asakawa, Yoda, & Takeoka (1990) used modular neural
networks to create a time prediction system which buys and sells stocks on the Tokyo Stock
Exchange. They developed a number of learning algorithms and prediction methods for the
system. The system achieved accurate predictions, and the simulations created for stock
trading showed an excellent profit.
Guresen, Kayakutlu, & Daim (2011) used Multilayer Perceptron (MLP), dynamic artificial
neural network (DAN2) and a hybrid neural network (GARCH) to predict daily closing values
on NASDAQ Stock Exchange. They used MSE and MAD to compare the efficiency for each
model. They’ve found that MLP gave satisfying results and was able to predict price
movements, DAN2 was architecturally inconsistent, and the hybrid neural network did not
give any meaningful results.
Chen, Zhou, & Dai (2015) modeled an LSTM neural network and used it to predict stock
returns on the stock market in China, and have found their prediction accuracy to increase
drastically when using an LSTM neural network.
And, as mentioned before, Chong, Han, & Park (2017) proposed a model for stock market
prediction using data from the Korean stock market. Hiransha, Gopalakrishnan, Menon, &
Soman (2018) tested artificial neural networks on the New York Stock Exchange and many
more papers have been written on this subject. Most of them conclude that artificial neural
networks can predict (to a certain extent) future price movements, and that they outpeform
most, if not all, currently used tools for stock market analysis and price prediction.
This conclusion can be drawn from the results in this paper as well. It is evident that even
simple neural network models can predict future price movements, and with further
optimization produce even more accurate results. However, further research and development
is required to be able to apply a neural network model in a real world environment.
6. Conclusion
As part of this work, two different artificial neural networks, LSTM and MLP, were built and
used to analyze and predict stock prices on the Zagreb Stock Exchange. The data sets used for
training and forecasting include historical stock prices of OPTE and HT were taken from the
Zagreb Stock Exchange.
This paper aimed to present models of deep learning, i.e. artificial neural networks, for
analysis and prediction of stock prices. This was achieved by using the Python programming
language and its packages. It is important to note that the neural networks used in this paper
are simple models, which, with adequate upgrades and optimization, can be improved
significantly. Besides, there are a large number of different artificial neural networks that are
not part of this paper but do possess the potential for analysis and prediction. One example
would be a Convolutional neural network, which is primarily used for computer vision but
can also be adapted to a task such as time series prediction. However, since the development
of more advanced neural networks requires greater investment and time, research has been
conducted with simpler neural network models.
However, even the results of simple artificial neural network models allow conclusions to be
drawn on the application of deep learning methods in the stock market, and one of the
conclusions is that they can be a powerful tool in stock analysis, which can reduce investment
risk and increase efficiency.
The availability of data today, as well as stronger processing computer power with the
development of related technology, allow both large and small investors to strengthen their
investments by using various tools. Classical analyses, technical and fundamental, can be
optimized by applying various methods, especially deep learning methods. The number of
research projects on deep learning is growing exponentially, and methodology and technology
are evolving daily, so it is highly likely that deep learning methods, and artificial intelligence
in general, will become standard instruments of stock analysis and price prediction.
It is important to emphasize that the models used in this paper use a simple neural network
architecture, which can most certainly be improved with time and resources. Nevertheless,
some conclusions can be drawn by observing and comparing the results. Furthermore,
numerous neural network architectures can be used for time series prediction, including
predicting stock prices. However, building and optimizing those architectures would also take
time, which is beyond the scope of this paper. All these architectures are continuously
upgraded; their efficiency is rising rapidly, as is their area of application. Therefore, this poses
a new potential area for future research.
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11th International Odyssey Conference on Economics and Business, Šibenik, Croatia - June 16-20, 2020

STOCK MARKET ANALYSIS AND PRICE PREDICTION

Mirjana PEJIĆ BACH

Source: Authors’ work

3.2. Research methods

4.1. Stock price prediction with MLP network

Figure 2: OPTE stock price prediction using MLP network

Source: Authors’ work

Source: Authors’ work

Figure 4: HT stock price prediction using MLP network

Source: Authors’ work

Source: Authors’ work

4.2. Stock price prediction with LSTM network

Source: Authors’ work

Source: Authors’ work

Source: Authors’ work

Figure 9: Comparison of actual and predicted HT stock prices using LSTM

Source: Authors’ work

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