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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

An Empirical Research and Comprehensive Analysis of Stock

Market Prediction using Machine Learning and Deep
Learning techniques

Aryendra Singh1, Priyanshi Gupta2, Narina Thakur2

1Department of Electronics and Communication Engineering, Bharati Vidyapeeth’s College of
Engineering, New Delhi, India
2Department of Computer Science and Engineering, Bharati Vidyapeeth’s College of Engineering, New

Delhi, India

aryendratomar30@gmail.com , priyanshigupta.cse1@bvp.edu.in , narinat@gmail.com

Abstract. Financial markets are inherently unpredictable. They continue to change based on the
performance of the company, past records, market value and are also dependent on news & timings. By
carrying out trend analysis, one has the ability to prejudge stock prices. Machine Learning Techniques that
are available, have the potential to forecast future stock prices. Each stock represents a different trend, so a
singular machine learning model can’t be applicable to other stocks. Thus, one model giving a high degree
of precision can’t guarantee working on another. Too many variables are involved while predicting stocks-
physical factors vs. psychological, irrational and rational behaviour, etc. All of these factors combined
indicate stock prices as capricious and difficult to foresee. In order to resolve this challenge, a
comprehensive study with historical data on stock prices of listed firms was performed. The main premise
behind this research was to illustrate how to apply machine learning algorithms such as Averaging, Linear
Regression including advanced deep learning techniques such as Long-Term Short Memory and applying
technical tools like the Modern Portfolio Theory and Bollinger bands.

1. Introduction
Institutional traders, Investment bankers, Forex account managers, Commodities Analysts, have
historically been considered the most coveted professions ever [1]. However, if one does not meet the
demands of the day, their abilities may be considered obsolete in the transforming era of data analysis.
Unquestionably, Data Science has become the hottest realm of the decade and has claimed its need in
every single corporate sphere. It was not long ago when Machine Learning / Artificial Intelligence
incorporated massive potential and was discovered in the financial world [2]. Data science has
progressively delivered valuable insights and helped to increase productivity in a significant amount,
benefiting everyone from a scalp trader to a long-term debt investor [3]. Stock market is an electronic
marketplace where buyers and sellers discuss business and trade their point of view. Broadly the task of
predicting stock markets can be divided into two parts; Basic analysis is to examine the financial return
or loss during the period and Mathematical analyses involve statistical analysis and charts to classify
stock market trends [4]. In the very first step, data was processed and analysed using Pandas library
because no one goes through millions of rows of numbers. Since, 'A picture speaks a thousand words',
one is inclined to draw stronger inferences from the data being referenced in a plotted form. The Data
Visualization function that covers plotting, basically acts as technical indicators in letting us make our
own business calls. In order to forecast the outcomes, diverse machine learning techniques were taken
into account [5]. If one thinks of testing a stock as fairly priced, then the Capital Asset Pricing Model
(CAPM) is crucial to consider, as it is used to describe the correlation between calculated risk and

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

expected return on assets, especially stocks. It is essentially used in finance to produce returns on those
investments that pose a risk to investments and their capital costs. In this research, in order for the
investors to pick a specific mix of assets based on their investment goals, the theory of Modern portfolio
was applied, which is the basic principle of diversification and the development of an effective frontier.
It notes that it is not necessary for the projected risk and return of a single stock to be investigated. It is
intended to help an investor control their risk by using the CAPM to build a portfolio. You may have
heard about overbought and oversold signals on the market, but there is a scientific research tool that is
Bollinger bands identified by a series of graphs that depict two standard (positive and negative)
deviations away from a simple moving average of an item's price. Bollinger Bands consist of three
bands, an Upper and Lower band, and a Moving Average (MA). Many traders think the company is
overbought and likewise oversold for a lower band if the price moves closer to the upper band. MPT
evaluates the diversification benefits, also known as not putting all of your eggs in one basket. The
portfolio's overall risk would likely be reduced. Cluster analysis is the method used in the financial
markets to group various objects that share similarities. Stocks that have a high return correlation come
down into one basket, those that are marginally less correlated in another, and so on, until each stock is
inserted in a category. The remainder of the paper is structured in the following way.

Section 2 offers a brief overview of the modelling and analysis of the literature on stock price
movement. Section 3 contains the name of the companies that were taken into consideration in the
dataset with a tag of small, mid and large capitalization. Furthermore section 4 describes calculation of
beta value using Linear regression. Prediction of Call against Bollinger bands has been discussed in
section 5. For the best accuracy for forecasting LSTM method was described in section 6. Section 7 tells
about the portfolio optimization to increase the returns. Section 8 gives the brief about the clustering
technique. And at last paper is concluded in section 9.

2. Related Work
In this section, we analyse recent trading models based on machine learning. The movement of stock
and stock price index for Indian stock markets was demonstrated in our first paper Jigar Patel.[6]. He
contrasts four prediction models in his research, Artificial Neural Network (ANN), Support Vector
Machine (SVM), Random Forest and Naive Bayes, with two methods for feedback to these models. The
first approach includes prices for OHLC (open, low, high, close), while the second approach focuses on
the deterministic trend results. Results show that three other prediction algorithms are performed by
Random Forest Classifier for the first approach. The Random Forest approach was introduced by
Subhadra Kompella, Kalyana Chakravarthy discussed other parameter categories, with fairly large
effects on a company's share price [7]. Study showed the polarity score of new products helped predict
accurate outcomes. Tae, Joon, Deuk, So Young introduced metrics of the financial network that could
be applied to investment strategies for global capital markets [8]. They proposed global stock market
guided and indirect volatility networks based on simple pairwise correlation and system-wide
connectivity of national stock indices using an auto-regressive model of the vector. Based on their
performance analysis data, network indicators have been shown to be important additional indicators in
global prediction. During market crises the market and those indicators were more successful. Our next
analysis is focused on Pratik Patel, Ching-Seh, Katerina and Marjan's Efficient Market Hypothesis
(EHM) [9]. This research uses graph theory to suggest a novel approach. This approach pulls knowledge
concerning the spatio-temporal relationship between various stocks by modelling the stock market as a
complex network. Two hybrid models have been developed, one from the historical stock price
correlation and the other from a causation-based graph. Their studies suggest that methods focused on
graphs did better than conventional methods. Shunrong, Haomiao introduced a new algorithm for
predictions that exploits the Temporary correlation between global stock markets and various financial
products with the help of SVM (Support Vector Machine) to forecast next day stock movement. Results
showed accuracy in NASDAQ at 74.4 percent, in S&P 500 at 76 percent and in DJIA at 77.6 percent.

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IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

3. Data Collection
Data consist of returns, i.e. percentage change in close price of different companies divided into small,
medium and large capitals with Indian Rupees currency as in Table1. A company's market capitalization
is the stock valuation. Small cap is a term used to identify the outstanding securities in comparatively
small-market capitalization companies. Normally a company below Rs 5000 crores in India is
considered as a small cap business. In small cap companies one can predict fairly high volatility. Mid
cap Company is a market capitalization company above Rs.5000 crores and less than Rs. 20000 crores.
Finally, large cap is a shortened version of the term 'large capitalization of the market.' Firms with higher
market capitalization than Rs.20,000 crores are called large cap firms. Considered the best of all
equitable [11].

Table1. Stocks with their respective sector of capitalisation

Small Caps Mid-Caps Large Caps

Ashoka Adani Adanisport
Bajaj Ajantfarm Asian
Bomdyeing Amarajabat Axis
Century Apollo Bajfinance
Fortis Bergepaint BPCL
Gujalkali Castround Cipla
IDFC Cummins Dreddy
Ircon DHFL Eicher
ITDC Excide Gail
Jetairways Gimrin HDFC

4. Beta Calculation using Ordinary Least Squares (OLS) Linear Regression

The beta value was calculated in this section using Linear Regression from stocks LT and Nifty50.
Ordinary Least Square Regression is a type of linear regression which is widely used in statistical
methods for predictive analysis.

Figure 1. Regression References

The Linear Regression approach is shown in Figure 1. It essentially gives us an equation where we have
our characteristics, depending on our target variable, as independent variables. While measuring the cost
of equity, an investor needs to calculate the beta of the company's stock. The Regression (slope) market
model can be used for calculating the beta of a publicly traded stock as in equation (1). With this process,
the company's stock returns were set back against the NIFTY50 [12].

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

𝑌 = 𝜃 × 𝑥 + 𝜃 × 𝑥 + …. 𝜃 × 𝑥 (1)

here, Y is dependent variable, x's are the independent variables and Ө is the slope of line.

Beta of an asset is a measure of the volatility of its earnings in comparison to a price benchmark (usually
an index of stocks). A stock that has a beta above 1.0 and changes more during time than the market.
The beta on the stock is less than 1.0 if a stock drops below the price. One thing to remember is that
high-beta stocks are expected to be more volatile but offer higher potential for return; low-beta stocks
present less risk but also lower returns [13]. Here are some of the difficulties with Beta when calculating:
● Calculated time frame: Beta is typically estimated for 2-9 years using historical evidence. Choosing
the measurement period has an impact on Beta calculation. If the estimation time is short it
represents the company's current dynamics.
● Return interval: An analyst can take stock and market daily, weekly, or monthly returns while
performing a regression. Generally, a shorter measurement time such as daily returns leads to lower
standard error, which is why regression models have been trained for the last 3 months to measure
daily beta value [14].
● Market index selection: The analyst must also carefully pick a market index to which to evaluate
the return. The index here taken was Nifty50.
● Small-cap stocks: These appear to be riskier than a greater potential for return. And analysts may
want to upward change the beta of small cap stocks. Stock selected for this reason was from large
cap i.e. Stock of the company LT.
Equation for the regression line is given by equation (2).

𝛾 = 𝛼 + 𝛽𝛾 (2)

where,
𝛾 are the stock's returns
𝛼 represents the intercept
𝛾 are the market returns
𝛽 is represented by the slope of the regression line.

5. Prediction of Call against Bollinger columns using K-NN classifier

The definition of classification had been discussed in this section. The classifier model was trained as
inputs with three Bollinger columns and the stock price (close price) and as performance of TITAN
company with 'Calls.'

Figure 2. Volatility between Titan & Figure 3. Moving average of Titan

Nifty50

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

Titan and Nifty index volatility were measured and compared firstly as shown in Figure 2. Second, call
is determined with the average price based on the graph of 21 day and 34 day moving average as shown
in Figure 3.

Figure 5. K-NN Classification

Figure 4. Titan's closing price's
Bollinger bands

Moving Average (MA) measures the average of a given price range by the number of time periods
within that range, typically closing prices as shown in Figure 4. MA is the technical indicator which can
help to assess whether an asset price will continue or reverse a trend. Stock chosen is TITAN and
NIFTY50. After the moving average graph has been plotted, call can be decided on the basis of their
behaviour i.e.; Call should be buying whenever the smaller MA (21) crosses over longer MA (34) and
Call should be selling whenever smaller MA (21) crosses under longer MA (34).
The Bollinger bands comprised of following data points:
● The 14-day rolling mean of the closing price
● Upper band which was the rolling mean +2 standard deviations away from the average.
● Lower band which was the rolling mean -2 standard deviations away from the average.
● Average Daily stock price.

Since Bollinger bands are measured using Moving Average (MA), as shown in equation ( 3.1) and
equation (3.2), they evaluate older consumer data the same as the more recent one, implying that
outdated data would dilute new details. Between the two bands, about 90 percent of the business activity
takes place [17]. Any division of the bands up or down is a big thing. The breakout isn't a trading hint.
Many people make the mistake of thinking that a warning to buy or sell is to strike the price or split one
of the bands. Breakouts give no indications as to the course and extent of the possible shift in prices[18].
This is the formula for the Bollinger band:

𝑈 = 𝑀𝐴 (𝑇𝑃) + 𝑚 × 𝜎 [𝑇𝑃, 𝑛] (3.1)

𝐿 = 𝑀𝐴 (𝑇𝑃, 𝑛) − 𝑚 × 𝜎 [𝑇𝑃, 𝑛] (3.2)

where:
U = Upper Bollinger Band
L = Lower Bollinger Band
MA = Moving average
TP (typical price) = (High + Low + Close) ÷ 3
n = Number of days in smoothing period (typically 20)
m = Number of standard deviations (typically 2)
σ [TP, n] = Standard Deviation over last n periods of TP.

K-NN algorithm is based on grouping similar related data points as demonstrated in Figure 5. Notice,
in the above picture that identical data points are similarly linked much of the time. The KNN algorithm
relies on this assumption as being valid enough to be helpful to the algorithm.

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

6. Proposed trading model: LSTM (Long-short term memory)

The knowledge interacts with LSTMs into a system known as cell states. LSTMs will then easily recall
or forget stuff this way [19]. Data has three different dependencies at a given cell level as demonstrated
in Figure 6. To any question such dependencies can be generalized as:
● Previous cell state (i.e. the memory information after the corresponding time step)
● The prior secret state (i.e. this is the same as the previous cell's output)
● The feedback during the current time stage (i.e. the new information being fed in at that
moment).
An illustration has been taken to imagine this. Take the example of forecasting product prices for a
specific stock. Today's stock price will depend on; the pattern, the market has observed in previous days,
either a downtrend or an uptrend, the stock price the day before, as often traders compare the previous
day price of the stock before purchasing it [20].

Figure 6. Architecture of LSTM

Factors which can influence today's stock price. It may be a new corporate strategy that is highly
opposed, or a decrease in income from the product, or even a sudden shift in the company's senior
management. In several ways, LSTMs provide an advantage over traditional neural feed-forward
networks and RNNs [21]. This is due to their ability of selectively retrieving patterns over long-time
spans.

7. Investment Portfolio Optimization

Modern Portfolio Theory (MPT) is a concept of how risk-averse investors can build portfolios to
maximise anticipated returns based on a given level of market risk. The conventional portfolio
methodology suggests that the risk and return characteristics of an investment should not be interpreted
in isolation, but should be determined from how the investment impacts the risk and return of the overall
portfolio [22]. MPT illustrates that to optimise the returns for a given degree of risk, an investor can
create a multi-asset portfolio. Similarly, when the amount of expected return is needed, an investor may
create a portfolio with the least risk. The success of an individual investment is less important than how
it affects the portfolio as a whole, based on statistical variables such as variance and correlation [23].
The estimation of the approximate return on the portfolio is the weighted value of the return on the
individual securities. If the portfolio contains four similarly weighted assets with expected returns of 4,
6, 10 and 14%, the approximate portfolio return will be as follows:

(4% x 25%) + (6% x 25%) + (10% x 25%) + (14% x 25%) = 8.5%

Considering 5 stocks, the portfolio can be mapped, ideally from various sectors and different limits and
same weight, i.e. 20 percent.

8. Clustering for diversification analysis

Following are objectives that has been done in order to cluster 30 stocks using K-means Clustering:

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

Figure 7. K-means Clustering Figure 8. Elbow Curve.

● Created a data-frame with a closing price of 30 different stocks, with 10 from each of the caps.
● Calculated average annual percentage return and volatility of all 30 stocks over a theoretical
one-year period.
● K-Means Clustering was applied on 30 stocks according to their mean annual Volatilities and
Returns
● Identified the optimum number of clusters using the elbow curve method.
● Prepared a separate data frame to show which stocks belong to the same cluster.

Clustering K-means is a type of unsupervised learning used where, as seen in Figure 7, unlabelled data
(i.e. data without specified categories or groups) is present [28]. The function of this method is to locate
groups in the data, with the variable K indicating the number of groups. The technique worked by
specifying each data point for one of the K groups based on characteristics. The results of the clustering
algorithm for K-means are K-cluster centroids that can be used to mark new data and to identify training
data (each data point is assigned to a single cluster). The elbow method as depicted in Figure 8 is an
algorithm used in cluster analysis when determining the number of clusters in a data set. The approach
consists of plotting the variance described as a function of the number of clusters, and choosing the
curve elbow as the number of clusters to be used. Optimum number of clusters has been calculated from
the above graph, i.e. k=5 is shown in Figure 9. Its basic philosophy is to select the 'k' where the error
suddenly decreases. Upon plotting the elbow curve, the error tends to reduce as 'k' gets bigger. That is
because they will be smaller as the number of clusters increases, because distortion is smaller too.

Figure 9. Prediction of cluster groups

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

9. Evaluation and Performance Measures

The various metrics used to evaluate our results are mentioned below

9.1. Root Means Square Error (RMSE)

The Root Means Square Error value (RMSE) is a frequently applied measure of the differences between
numbers which is predicted by an estimator or a mode. It describes the sample standard deviation of the
differences between the predicted and observed values as mentioned below in equation (4).

RMSE= ∑ (𝑝𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑 − 𝑎𝑐𝑡𝑢𝑎𝑙 ) ÷ 𝑁 (4)

where,
𝑝𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑 - are the predicted values.
𝑎𝑐𝑡𝑢𝑎𝑙 - are the actual values.

9.2. Slope of the regression line- Beta (𝛽)

Slope of the regression line is given by equation (5)

𝛽= (5)

Covariance here is a measure of the relative return of a stock, and variance is a measure of how the
price moves relative to its mean [15].

9.3. Formula to predict accuracy score of K-NN classification model

The accuracy for K-NN model is given by equation (6)

𝑆𝑐𝑜𝑟𝑒 = (6)

where,
TP→ 𝑇𝑟𝑢𝑒 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒
TN→ 𝑇𝑟𝑢𝑒 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒
FP→ 𝐹𝑎𝑙𝑠𝑒 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒
FN→ 𝐹𝑎𝑙𝑠𝑒 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒

9.4. Sharpe Ratio:

Sharpe Ratio given by equation (7) is used to measure past output of a portfolio, where the calculation
uses real returns. The higher the Sharpe ratio, the better the adjusted-risk efficiency [27].

𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜 = (7)

where,
𝑅 = Return of Portfolio
𝑅 = Risk free rate
𝜎 = Standard deviation of portfolio excess’s return.

10. Result and Analysis

The outputs from implementing multiple models is mentioned as below

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

10.1. Model's output for Beta Calculation using Ordinary Least Squares (OLS) Linear Regression
The values fitted in the model were the percentage change of close price of both, LT and NIFTY50 as
depicted in Figure 10. The blue dots are the real values in this scatter graph and the red line is the set of
expected values drawn by the model [16].

Figure 10. OLS linear regression output

To more comprehensively examine the model 's impact, this paper analyses the model 's success from
RMSE generated as 0.013, which means the algorithm was pretty accurate and Beta generated as 0.609,
that means for the past three months, the LT stock would be 60.9% less volatile compared to the nifty50.

10.2. Simulation of model output and evaluation results of Call against Bollinger Bands
For the chosen stocks; TITAN and NIFTY50, Bollinger bands were plotted- with a period of 14 days
and 2 standard deviation away from the average [16] as shown in Figure 11. Here the call would be:
● 'Buy' if the stock price is below the lower Bollinger band.
● 'Hold' buy/liquidate buy if the stock price is between the lower and middle band.
● 'Hold short/liquidate buy' if the stock price is between the middle and upper band.
● 'Short' if the stock price is between the middle and upper Bollinger band.

Figure 11. Prediction of Daily Calls

Accuracy for this KNN model is 84.3%.

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

10.3. Model output and Performance for LSTM

The stock price output is depicted as in Figure 12. The orange line predicted close value for the stock
by test data. The green line is the predicted close price for the stock by test data (orange colour). Model
efficiency is found to be 58.44 with 1/1 epoch, which is good because it is much less than 180. The
efficiency of the Model is found to be 58.44 with 1/1 epoch, which is good because it is much less than
180.

Figure 12. LSTM prediction output

10.4. Experiment results and analysis for Investment Portfolio Optimisation

Now annual returns and volatility were determined using mean and covariance of the entire portfolio as
you can see in Figure 13 below. Stocks chosen were: Raymond, Ashoka, LT, Voltas, Godrej. The
effective frontier curve [24] lies on both points. The category of standardised portfolios with the highest
expected return for a known level of risk or the lowest risk for a given expected return is the productive
frontier. Portfolios below active boundaries are sub-optimal because there is inadequate return on risk
concentrations [25]. The efficient frontier is graphically representative of investments that maximise
returns for the estimated risk. A protection standard deviation is a synonym for fear. The relation is not
a linear one. In other words, adding more exposure to a portfolio doesn't yield equivalent returns.
Optimal boundary portfolios appear to have a higher level of diversification than sub-optimal, generally
less robust, portfolios [26].

Figure 13. Annual returns, Figure 14. Scatter plot of portfolio

volatility and Sharpe ratio of
the entire portfolio.

Red star in Figure 14 indicates Sharpe ratio is the highest. The green star indicates volatility is the lowest.
It is the ratio of the average return received per unit of volatility in excess of the risk-free rate.

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ICCRDA 2020 IOP Publishing
IOP Conf. Series: Materials Science and Engineering 1022 (2021) 012098 doi:10.1088/1757-899X/1022/1/012098

11. Conclusion
The research was carried out to test all of the parameters and to analyse how stock market prediction
actually works. There are several companies that are lacking at the moment because they can’t anticipate
or foresee future problems in order to make the right choices. Different techniques have been utilised in
this project work like Linear regression, K-means Clustering, K nearest neighbour, LSTM, etc. Use of
algorithms in stock prediction has proven to be essential and has thus marked their use in strong market
plans. Bollinger bands could be a valuable tool for traders to measure their position's volatility and give
them guidance into when to enter and leave a position. Such approaches would be a great help for brokers
and investors to invest money in the stock market because they are based on an immense range of
historical data after being checked on sample data. The analytics can also be used to evaluate public
opinion content and thus establish patterns/connections between public and industry employees. Hence,
evaluating the outcomes through this paper, we can see that technology also has a fair distance to go
before it is completely capable of resolving the stock markets' mystery.

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