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**Networks: Promising Directions for Modeling
**

W. D. S. Roshan, R. A. R. C. Gopura, Member, IEEE, A. G. B. P. Jayasekara, Member, IEEE.

Abstract- Financial forecasting plays a critical role in present

economic context where neural networks have become a good

alternative technique over traditional methods. Vast ranges of

neural models are developed to achieve better accuracy in

forecasting. In addition, the ways to find out a good neural

architecture is being explored by the research community. In the

literature, main problems are figured out within the area of data

preparing and neural network design. In this paper, the reasons

that affect the performance of the models are discussed based on

empirical and mathematical evidence. Finally, this paper

presents the directions towards a more suitable neural model for

financial forecasting by combining data preprocessing

techniques, clustering techniques and support vector machine.

Index Terms— Back propagation, Bias variance dilemma,

Cover’s theorem, Self-organizing maps, Structural risk

minimization, Support vector machine, Wavelet transform.

I. INTRODUCTION

Forecasting exchange rates plays a major role in day-to-

day financial markets, which becomes a difficult task due to

high volatility and complexity. Even though it is easy to trade

in financial markets, it is very difficult to make a profit as a

result of highly unpredictability of exchange rates. During the

past few years ample research has been carried out on

understanding inter-relations within financial market data.

Recently, there is an increasing trend on adopting artificial

neural networks (ANN) and its variants, in order to explore

non-linearites of the financial data [1]. Even with vast

amounts of available financial data, identification of

underlying patterns has become difficult due to economic,

political, environmental, and even psychological factors that

affect the fluctuation of exchange rates. Under these

circumstances data-driven self-adaptive feature of ANN [2]

and universal functional approximation capability are highly

desirable in financial forecasting.

Even though ANN has achieved good performance than

the conventional forecasting methods there are certain

limitations in designing ANN models [3], [4]. The common

limitations that are highlighted in this work are within the

area of data preparing and neural network design. In order to

overcome those limitations, different existing data pre-

processing techniques and neural network architectures are

compared to highlight the strengths and weaknesses of them.

W. D. S. Roshan is with the Department of Mechanical Engineering,

University of Moratuwa, Katubedda, Sri Lanka.

(e-mail: sameeraroshanuom@gmail.com).

R. A. R. C. Gopura is with the Department of Mechanical Engineering,

University of Moratuwa, Katubedda, Sri Lanka (corresponding author:+94-

11-2640472; fax: +94-11-2650622; e-mail: gopura@mech.mrt.ac.lk).

A. G. B. P. Jayasekara is with the Department of Electrical Engineering,

University of Moratuwa, Katubedda, Sri Lanka

(e-mail: buddhika@elect.mrt.ac.lk).

Then, the directions towards a more suitable model for

forecasting are explored.

Section II and section III are based on empirical

evidences. Input selection and input data pre-processing are

discussed in section II under data preparing. Learning

algorithm selection, neural architecture and performance

measure selection are discussed under neural network design

in section III. Mathematical background and empirical

evidence for selecting particular choices for data preparing

and network design are discussed in section IV. Section V

concludes the paper.

II. DATA PREPARING

A. Input selection

The selection of inputs for neural networks directly affect

to its performance. In the field of financial market

forecasting, most of the researchers have used time delay

inputs and various technical indicators (moving average,

stochastic oscillator etc.) as inputs for the neural network [4].

There are large numbers of technical indicators and they got

their own strengths over others. However, use of technical

indicators as much as possible does not necessarily lead to

better forecasting results; rather it will weaken the forecast

due to curse of dimensionality [5]. Hidden relations among

inputs can lead to the bias effect of neural network.

Therefore, inputs should be selected carefully. Selected inputs

should not be correlated with other inputs and should have

maximum correlation with itself to achieve better forecast.

There is no general method to select input parameters of a

neural network. In [6], four technical indicators have been

used. In [7] five technical indicators have been used while [8]

uses 53 financial indices. Furthermore [9] used 75 technical

indicators. However, most researchers focused on finding

optimal input variables among the available inputs. Rescaled

range analysis [10], [11], [12] and Lyapunov exponent [13]

are used as a measure of time series predictability and

forecastable time span is selected using those analyses. Trial

and error, stepwise-regression [14], auto-regression testing

[15], [16], [17] genetic algorithm based selection techniques

[18], [19] are used to find most influential input variables by

removing redundant ones. About 45% articles that are

reviewed in this study have used technical indicators while

35% used time lagged inputs. Details of the selected inputs

are presented in Table I.

B. Input data preprocessing

Data preprocessing is essential for better neural network

performance especially for financial time series forecasting.

Financial time series has highly noisy, nonlinear and

TABLE I

INPUT PARAMETERS USED AS INPUTS

Article Input

Indica-

tor

[6] Four inputs(TAIEX index futures prices

and technical indicators)

•

[8] 53 financial indices •

[9] 75 technical indicators •

[10] Time delay inputs, indicators 9

[13] Reconstructed phase space variables,

normalized daily closing price,

~

[19] 23 technical indicators •

[20] 5 financial indices

[21] Technical indicators •

[22] Daily opening, closing, highest and

lowest price and daily trade volume

9

[23] Current fundamental asset price, strike

price and time-to-maturity

[24] 27 technical indicators •

[7] [11] [25]

[26] [27] [28]

[29]

4 to10 technical indicators

•

[18] [30] [31]

[14] [32] [33]

[34]

10 to 20 technical indicators

•

[15] [16] [17]

[35] [36] [37]

[38] [39] [40]

[41] [42] [43]

[12]

Time lagged price values

9

• Technical Indicators 9 Time lagged inputs

Fundamental indicators ~ Other

nonstationary characteristics which reduces the overall

network performance. Almost all recently published articles

have used advanced data preprocessing techniques such as

self-organizing maps (SOM) [27], [28], [33], [35], [41]

clustering techniques [9], [14] genetic algorithm (GA) based

systems [18], [19] principal component analysis (PCA) [43]

independent component analysis (ICA) [6] and wavelet

transform (WT) [34], [41]. Among those techniques SOM,

PCA, ICA, WTs and combinations of these techniques have

given the promising results. When selecting a specific method

from above promising approaches, PCA has drawback of

missing small amount of time series characteristics and better

to use with nonlinear extension to deal with nonlinear

characteristics of time series. When selecting ICA,

nonstationary effect can affect the performance of separation

of independent sources. On the other hand, WT is superior

alternative for process nonstationary and noisy time series. Its

multilevel decomposition and orthogonal data projection

capability have been used to remove the inter relations of

inputs, noise and nonstationary characteristics of the financial

time series.

III. NEURAL NETWORK DESIGN

A. Learning algorithm

Learning algorithm is another key factor for neural network

performance. When selecting learning algorithm, although

[44] has shown that scaled conjugate gradient and Bayesian

regularization based models show competitive results and

these models forecasts more accurately than that of back

propagation (BP) according to [3], multilayer feed forward

network with BP is most widely used network design and

also lead to satisfactory results. However, BP algorithm has

some undesirable disadvantages such as slow convergence

speed, higher likeliness to get trapped in local minima, initial

weight determination, and selecting transfer functions.

Recurrent neural network (RNN), a variant of feed forward

ANN, has effectively used in some models [13], [34].

Recently many researchers have shown that SVM is more

suitable and has performed better than other algorithms in

[19], [20], [29], [30], [42].

B. Architecture selection

Generally, neural networks are fed with past data and get

the future values as outputs. The network should be able to

positively identify relationships within inputs. If the network

architecture become more complex it will be difficult to

recognize patterns and often lead to over fit. Too many

hidden neurons and higher number of training epochs can

also be caused neural network to over fit. On the other hand,

if the network is designed with more simple architecture it

will not be able to separate correct patterns from input data

and often lead to under fitting. Recently more and more

researchers are realizing that using a single neural network

may lead to bias effect and combining multiple neural

architectures can consistently outperform the single models

[3]. There is an improving attention going on for applying

hybrid models and ensemble models for better performance

[9], [12], [20], [40], [43].

C. Performance measure

The network performance is assessed by the performance

measures. Mean squared error (MSE) [17], [22], normalized

mean squared error (NMSE) [10], [27], root mean square

error (RMSE) [24], [34], mean absolute error (MAE),

directional symmetry (DS) [6], [14], and mean absolute

percentage error (MAPE) [14], [23] are widely used

indicators as performance measures. In addition, [35] used

profit as the performance measure. Rather than using just one

performance measure, combination of performance measures

like error, directional and profit [21] gives better

understanding of the performance of the model.

IV. MATHEMATICAL BACKGROUND AND EMPIRICAL

EVIDENCE

A. Cover’s theorem

Determining number of hidden neurons is critical for good

accuracy. According to Cover’s theorem [45] “A complex

pattern-classification problem cast in a high-dimensional

space nonlinearly is more likely to be linearly separable than

in low dimensional space”. If the input space is transformed

into higher dimensional space according to Cover’s theorem,

it is easy to linearly separate those patterns and advisable to

choose higher number of hidden neurons than number of

input nodes. Higher number of hidden nodes than the input

nodes has been found in [15], [16], [17], [21], [22], [25]

while [26] claimed best neural model as 9-3-1 architecture.

Radial basis functions (RBF) [31] and SVM have more

principal basis for construction and often create their

architecture according to Cover’s theorem.

B. Structural risk minimization

Generalization error should be kept in minimum possible

value for best performance. Therefore, reduction of upper

bound of the generalization error is essential for every

forecasting model. Vapnik–Chervonenkis (VC) dimension,

first proposed by [46], is the representation of maximum

number of examples that can be learned by a learning

network without an error. VC dimension plays major role in

finding upper bound of generalization error. They have

defined the guaranteed risk (upper bound of the

generalization error) I

g

as in (2), where e

0

(N, b, o) is

confidence interval and it depends on training sample size

N, VC-dimension b, and probability o.

e

0

(N, b, o) = _

h

N

jlog

2N

h

+ 1[ -

1

N

log o (1)

I

g

(w) = I

t

(w) + 2 e

0

2

(N, b, o) _1 +

_

1 +

¡

w

e

0

2

(N,h,u)

] (2)

Here, training error is denoted by I

t

and w represents weight

vector for the fixed training set. There is a value of h, which

reduces the upper bound of generalization error to its

minimum possible value. According to [47], VC dimension, h

of purely linear network is proportional to number of free

parameters w, purely threshold neural network is

proportional to wlog w, while Sigmoidal activation function

based feed forward neural architectures has VC dimension

proportional to W

2

. Going through above-mentioned proofs,

upper bound of generalization error can be varied by varying

number of hidden neurons. Due to the fact most articles

related to feed forward neural networks have used trial and

error methods to find the architecture with best generalizing

capability. Results have shown significant improvement of

the generalization capability [26], [40]. Unlike feed forward

neural networks and RBF networks, SVM has interesting

property of structural risk minimization. SVM’s VC

dimension is bounded from above as shown in (3). b can be

minimized by properly selecting the optimal margin of

separation p and it is independent of the dimensionality of the

input space m

0

and thus immune to the curse of

dimensionality. Let Ð denote the diameter of smallest ball

containing all the input vectors b can be written as,

b ¸ min ]¡

Ð

2

p

2

[ , m

0

¿ + 1 (3)

Empirical evidences [19], [29], [30], [38], [42] along with the

structural risk minimization property have shown that SVM

achieved good generalization performance than feed forward

ANN and RBF networks in their benchmark performance

comparisons. Significant comparison was not performed

within SVM and recurrent models. However [9] claimed that

ensemble recurrent model outperform single SVM.

Mathematical evidence for ensemble performance is

discussed in next section.

C. Neural network generalization and Bias variance

dilemma

Generalization of neural network is still a challenging

problem. For a good generalization, the model should give

low training error as well as low testing error. Cross

validation is the most widely used generalization method for

feed forward neural networks. Input data set is divided into

three sets called training, validation and testing. Training set

is used to train the neural network. Validation set contains the

data that has never seen by the neural network. Validation set

is used in training along with training set to calculate out of

sample error. If the output of the sample error increases for

consecutive iterations, it will be the stopping criteria for

network training. However, there is a risk of early stopping

the training. Even using optimized VC dimension to reduce

the upper bound of generalization error as presented in

section IV-B, once it reaches its minimum point,

generalization error cannot be reduced further more for a

single network. This is due to well-known bias variance

dilemma. Average value of the estimation error between the

regression function E|Ð|X = x] and the approximating

function F(x, w)evaluated over entire training set ¡ can be

written as follows.

I

u¡

(¡(x), F(x, ¡)) = B

2

(w) +I(w) (4)

B(w) And I(w) are defined by

B(w) = E

:

|F(x, ¡)] - E|Ð|X = x] (5)

I(w) = E

:

|(F(x, ¡) - E

:

|F(x, ¡)])

2

] (6)

Here, bias B(w) is the representation of inability to

approximate the regression function by given network and

variance I(w) is the representation of lack of information

contained in the training sample. A single neural network

achieves low bias result for higher variance and vice versa,

unless training set is infinitely large. However, infinitely

large training set cause slow convergence due to its size [48].

In a neural architecture design, bias/variance dilemma should

be considered seriously. Therefore, both bias and variance

should be kept in small values in order to achieve good

generalization. According to principal of divide and concur,

dividing a computationally complex task into

computationally simple tasks and combining its output to take

the solution is a better method for solving such task [49] .This

method allows reduction in the variance by combining

multiple over-trained models, which are trained to zero bias.

It will reduce both bias and variance at once for a finite

training set, thus remove the bias variance dilemma.

Empirical evidence for reducing the bias variance dilemma be

found in [14], [27], [28], [33], [35], [41]. Summary of all

reviewed articles are presented in Table II.

TABLE II

SUMMARY OF MODELING TECHNIQUES

Article

Data

preprocessing

Network type

Training

method

Benchmark models Performance measures

[6] Normalize,

ICA

SVM Support vector

regression(SVR)

Random walk (RW), SVR RMSE, NMSE MAD,

DS ,correct down

trend (CD) , correct up

trend (CP)

[7] Normalized Dynamic

Ridge

Polynomial

ANN

Constructive

learning algorithm

Multilayer perceptron (MLP),

Functional Link Neural Network (FLNN),

Pi-Sigma Neural Network (PSNN),

Ridge Polynomial Neural Network

(RPNN)

NMSE,

Annualized Return

[8] Grey Relational Analysis FFANN BP ANN, ANN / Grey model (1, N ) RMSE

[9] Euclidean distance based

partitioning

Recurrent

ensemble

model

Genetic algorithm

(GA)

Genetic programming prediction, SVM Frequency of correct

prediction

[10] Rescaled range analysis FFANN BP Auto regression integrated moving

average(ARIMA)

NMSE, Gradient

[11] Rescaled range analysis+

Normalizing+ sensitive

analysis

FFANN BP ARIMA

3-Benchmark models for profit calculation

NMSE, Sign statistics

[12] Normalizing+

Hurst exponent

Ensemble vary FFANN, K-nearest neighbor, Decision

tree, Native Bayesian classiﬁer

Average error rate

[13] Phase Diagrams,

Correlation Dimension,

Lyapunov exponent

Probabilistic

neural network

TDNN,RNN

Temporal BP,

Extended Kalman

ﬁlter,

Fisher linear classiﬁer False alarms

[14]

Step wise regression

analysis +Normalizing+

Dynamic learning

algorithm based clustering

RBF Particle-swarm

optimization (PSO)+

adaptive recursive

least-squares

Type 2 fuzzy time series model, Fuzzy

time series model, Fuzzy dual-factor time-

series

MAD,MAPE,DS,CP,

CD

[15] Auto-regression testing FFANN Adaptive BP Standard BP, LM-based learning,

Extended Kalman filter (EKF), BP with

optimal learning rates

NMSE,

Directional change

statistics (DS)

[16] Auto-regression testing FFANN BP Learning

Algorithm with

Adaptive

Forgetting Factors

Batch learning, EKF-based learning,

Levenberg-Marquardt(LM)based learning,

Standard BPNN

NMSE,

DS

[17] Auto-regression testing FFANN BP + Adaptive

Smoothing+

Momentum Terms

Four different networks with modified

back propagation for each

MSE

[18] GA based instant selection FFANN GA GA-ANN Hit ratio

[19] GA SVM SVR RW ,ARIMA , linear discriminant

analysis, BPANN, SVM, GA-SVM

Hit ratio

[20] - Stochastic

Volatility (SV)

model with

jumps +SVM

SVR ANN-SV, Garman–Kohlhagen model MAE, MAPE

[21] - ANN GMDH algorithm FFANN RME, MAPE,DS,

Profitability

[22] Normalize FFANN BP+ Stochastic time

effective function

- MSE

[23] Grey-GJR–GARCH FFANN BP - RMSE , MAE, MAPE

[24] Particle swarm optimization

+ normalize

FFANN BP ANN models with different indicators as

inputs

MSE, RMSE, MAE

[26] - FFANN Improved bacterial

chemotaxis

optimization

(IBCO)+BP

BPANN MSE

[27] Normalize, Self-organizing

feature maps

SVM SVR SVR NMSE,MAE,

DS,WDS

[28] Kohonen self-organizing

map

FFANN BP BSE-30 SENSEX Not specified

[29] Z-score normalization

method

SVM Adaptive SVR Three-layer BP neural network,

Regularized RBF neural network

NMSE, DS,

MAE

[30] Normalize SVM SVR BPANN, Case based reasoning Hit ratio

[31] Extract indicators with

better performance

RBF Artiﬁcial ﬁsh swarm

algorithm +K means

clustering

RBF optimized by GA ,PSO,

ARIMA,ANN,SVM

Error ratio

[32] Mean removal SVM SVR 5 SVM based feature selection methods DS

[33] Normalize + Self-

organizing feature maps

SVM SVR + grid search Single SVR MSE, MAE, MAPE

[34] Wavelet transform RNN artiﬁcial bee

colony

algorithm(ABC)

BP-ANN, conventional ANN optimized by

the ABC algorithm, two conventional fuzzy

time-series models

RMSE, MAE, MAPE,

Theil’s inequality

coefficient

[35] Normalization + Kohonen

SOM

FFANN temporal BP FFANN, Highly Granular Unsupervised

time Lagged Network

Profit

[36] - FFANN BP Adaptive exponential smoothing RMSE, Correct

tendencies number

[37] - Exponential

Smoothing

+FFANN

BP BPNN, Exponential Smoothing Forecast

model

RMSE, DS

[38] Normalizing + Interval

variation

Ensemble

SVM

Proposed multi-

stage SVM-based

nonlinear

ensemble model

Ensemble models trained using simple

averaging , Simple MSE, Stacked

regression, Variance-based weighting ,

Artificial neural network

RMSE

[39] GARCH(1,1) Volatility FFANN Conjugate gradient

based method

BS model with historical volatility ,BS

model with GARCH(1,1), SV, SVJ

Average absolute and

average squared errors

[40] Proposed interval sampling

method

FFANN PCA+

Meta-modeling

ARIMA,FNN,SVM, 4 meta-models

NRMSE, DS

[41] Recurrent Self-Organizing

Map + Wavelet transform

kernel partial

least square

regressions

- ANN, SVMs, Generalized autoregressive

conditional heteroskedasticity (GARCH)

RMSE

[42] Chaos-based delay

coordinate embedding

SVM SVR Pure SVR, Chaos-BPNN, BPNN MSE, RMSE, MAE

[43] Normalize GLAR+PCA +

FFANN-

ensemble

BP Generalized auto regression(GLAR), ANN,

Hybrid, Equal weights, Minimum error

NMSE, DS

V. CONCLUSION AND SUGGESTIONS

Financial forecasting is a challenging problem and still an

open research area. This paper presents the empirical and

mathematical evidences for working towards most suitable

forecasting model. Data preparing and neural architecture

design are identified as two main problems. ICA, PCA, WT

are superior to available various data preprocessing

techniques. However, any comparison between ICA, PCA

and WT has not performed in previous approaches. The non-

stationary effect can be removed by using WT and clustering

input space into multiple clusters. Then the bias variance

dilemma can be removed by combining individual networks

which are trained for each cluster. SVM is proposed to be the

most suitable model based on empirical and mathematical

evidence. Structural risk minimization property raises SVM

performs better than other algorithms. By going through

above mentioned mathematical and empirical evidence, it can

be concluded that wavelet decomposition or ICA and PCA

with nonlinear and nonstationary extensions can be utilized to

preprocess input data. Preprocessed input space clustered

with clustering techniques like SOM or its variants, the use of

SVM model for each cluster, and combining these models

will lead to superior performance and will be a good area for

future researches.

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23 technical indicators 5 financial indices Technical indicators Daily opening. NEURAL NETWORK DESIGN A. [19] principal component analysis (PCA) [43] independent component analysis (ICA) [6] and wavelet transform (WT) [34]. [41] clustering techniques [9]. If the network architecture become more complex it will be difficult to recognize patterns and often lead to over fit. Recently many researchers have shown that SVM is more suitable and has performed better than other algorithms in [19]. closing. [23] are widely used indicators as performance measures. [20]. WTs and combinations of these techniques have given the promising results. [12]. multilayer feed forward network with BP is most widely used network design and also lead to satisfactory results. [35]. [30]. Recurrent neural network (RNN). root mean square error (RMSE) [24]. Architecture selection Generally. On the other hand. [35] used profit as the performance measure. Learning algorithm Learning algorithm is another key factor for neural network performance. strike price and time-to-maturity 27 technical indicators 4 to10 technical indicators 10 to 20 technical indicators • Time lagged price values Indicator • • • • • these models forecasts more accurately than that of back propagation (BP) according to [3]. [14] genetic algorithm (GA) based systems [18]. Rather than using just one performance measure. directional and profit [21] gives better understanding of the performance of the model. If the input space is transformed into higher dimensional space according to Cover’s theorem. Higher number of hidden nodes than the input . and selecting transfer functions. ICA. IV. Too many hidden neurons and higher number of training epochs can also be caused neural network to over fit. When selecting ICA. When selecting a specific method from above promising approaches. Its multilevel decomposition and orthogonal data projection capability have been used to remove the inter relations of inputs. combination of performance measures like error. Among those techniques SOM. When selecting learning algorithm. [43]. directional symmetry (DS) [6]. Mean squared error (MSE) [17]. it is easy to linearly separate those patterns and advisable to choose higher number of hidden neurons than number of input nodes. WT is superior alternative for process nonstationary and noisy time series. In addition. According to Cover’s theorem [45] “A complex pattern-classification problem cast in a high-dimensional space nonlinearly is more likely to be linearly separable than in low dimensional space”. PCA. C. MATHEMATICAL BACKGROUND AND EMPIRICAL EVIDENCE • • Technical Indicators Fundamental indicators Time lagged inputs Other nonstationary characteristics which reduces the overall network performance. if the network is designed with more simple architecture it will not be able to separate correct patterns from input data and often lead to under fitting. normalized daily closing price. [33]. neural networks are fed with past data and get the future values as outputs. nonstationary effect can affect the performance of separation of independent sources. B. Almost all recently published articles have used advanced data preprocessing techniques such as self-organizing maps (SOM) [27]. [40]. mean absolute error (MAE). [22]. III. [28]. a variant of feed forward ANN. highest and lowest price and daily trade volume Current fundamental asset price. normalized mean squared error (NMSE) [10]. although [44] has shown that scaled conjugate gradient and Bayesian regularization based models show competitive results and A. [27]. [29]. There is an improving attention going on for applying hybrid models and ensemble models for better performance [9]. and mean absolute percentage error (MAPE) [14]. On the other hand. [41]. initial weight determination. However. [42]. PCA has drawback of missing small amount of time series characteristics and better to use with nonlinear extension to deal with nonlinear characteristics of time series.TABLE I INPUT PARAMETERS USED AS INPUTS Article [6] [8] [9] [10] [13] [19] [20] [21] [22] [23] [24] [7] [11] [25] [26] [27] [28] [29] [18] [30] [31] [14] [32] [33] [34] [15] [16] [17] [35] [36] [37] [38] [39] [40] [41] [42] [43] [12] • Input Four inputs(TAIEX index futures prices and technical indicators) 53 financial indices 75 technical indicators Time delay inputs. Recently more and more researchers are realizing that using a single neural network may lead to bias effect and combining multiple neural architectures can consistently outperform the single models [3]. noise and nonstationary characteristics of the financial time series. Performance measure The network performance is assessed by the performance measures. indicators Reconstructed phase space variables. BP algorithm has some undesirable disadvantages such as slow convergence speed. has effectively used in some models [13]. The network should be able to positively identify relationships within inputs. higher likeliness to get trapped in local minima. [14]. [34]. [20]. [34]. Cover’s theorem Determining number of hidden neurons is critical for good accuracy.

[28]. Structural risk minimization Generalization error should be kept in minimum possible value for best performance. [33]. bias/variance dilemma should be considered seriously. [17]. [35]. training error is denoted by and represents weight vector for the fixed training set. both bias and variance should be kept in small values in order to achieve good generalization. generalization error cannot be reduced further more for a single network. For a good generalization. is confidence interval and it depends on training sample size N. C. . Due to the fact most articles related to feed forward neural networks have used trial and error methods to find the architecture with best generalizing capability. reduction of upper bound of the generalization error is essential for every forecasting model. 2 . and probability . . However. If the output of the sample error increases for consecutive iterations. which reduces the upper bound of generalization error to its minimum possible value. bias is the representation of inability to approximate the regression function by given network and variance is the representation of lack of information contained in the training sample. It will reduce both bias and variance at once for a finite training set. According to [47]. Here. They have defined the guaranteed risk (upper bound of the generalization error) as in (2). Results have shown significant improvement of the generalization capability [26]. VC dimension. h of purely linear network is proportional to number of free parameters . A single neural network achieves low bias result for higher variance and vice versa. first proposed by [46]. the model should give low training error as well as low testing error. [30]. thus remove the bias variance dilemma. [42] along with the structural risk minimization property have shown that SVM achieved good generalization performance than feed forward ANN and RBF networks in their benchmark performance comparisons. . dividing a computationally complex task into computationally simple tasks and combining its output to take the solution is a better method for solving such task [49] . while Sigmoidal activation function based feed forward neural architectures has VC dimension proportional to W . Input data set is divided into three sets called training. Mathematical evidence for ensemble performance is discussed in next section. where . Let denote the diameter of smallest ball containing all the input vectors can be written as. purely threshold neural network is proportional to . Therefore. Therefore. infinitely large training set cause slow convergence due to its size [48]. [27]. there is a risk of early stopping the training. unless training set is infinitely large. Significant comparison was not performed Here. Even using optimized VC dimension to reduce the upper bound of generalization error as presented in section IV-B.nodes has been found in [15]. SVM’s VC dimension is bounded from above as shown in (3). is the representation of maximum number of examples that can be learned by a learning network without an error. SVM has interesting property of structural risk minimization. Average value of the estimation error between the | and the approximating regression function function . 1 (3) Empirical evidences [19]. According to principal of divide and concur. 1 1 1 (1) (2) within SVM and recurrent models. There is a value of h. VC dimension plays major role in finding upper bound of generalization error. Unlike feed forward neural networks and RBF networks. Empirical evidence for reducing the bias variance dilemma be found in [14]. Vapnik–Chervonenkis (VC) dimension. which are trained to zero bias. B. This is due to well-known bias variance dilemma. . can be minimized by properly selecting the optimal margin of separation and it is independent of the dimensionality of the input space and thus immune to the curse of dimensionality. [40]. once it reaches its minimum point. . Neural network generalization and Bias variance dilemma Generalization of neural network is still a challenging problem. evaluated over entire training set can be written as follows. . . Validation set contains the data that has never seen by the neural network. [22]. [41]. And . [29]. In a neural architecture design. Radial basis functions (RBF) [31] and SVM have more principal basis for construction and often create their architecture according to Cover’s theorem. . [16]. However. Validation set is used in training along with training set to calculate out of sample error. . (4) (5) (6) are defined by . [25] while [26] claimed best neural model as 9-3-1 architecture. . validation and testing. | . it will be the stopping criteria for network training. VC-dimension .This method allows reduction in the variance by combining multiple over-trained models. upper bound of generalization error can be varied by varying number of hidden neurons. Training set is used to train the neural network. [21]. Going through above-mentioned proofs. Cross validation is the most widely used generalization method for feed forward neural networks. Summary of all reviewed articles are presented in Table II. [38]. However [9] claimed that ensemble recurrent model outperform single SVM.

Fuzzy time series model. BP with optimal learning rates Batch learning. NMSE MAD. Regularized RBF neural network BPANN. Annualized Return [7] Dynamic Ridge Polynomial ANN FFANN Recurrent ensemble model FFANN FFANN Ensemble Probabilistic neural network TDNN. ANN / Grey model (1. DS MSE Hit ratio Hit ratio MAE. MAPE [14] [15] [16] FFANN FFANN [17] [18] [19] [20] Auto-regression testing GA based instant selection GA - FFANN FFANN SVM Stochastic Volatility (SV) model with jumps +SVM ANN FFANN FFANN FFANN FFANN [21] [22] [23] [24] [26] Normalize Grey-GJR–GARCH Particle swarm optimization + normalize - GMDH algorithm BP+ Stochastic time effective function BP BP Improved bacterial chemotaxis optimization (IBCO)+BP SVR BP Adaptive SVR SVR Artiﬁcial ﬁsh swarm algorithm +K means clustering FFANN ANN models with different indicators as inputs BPANN RME. Lyapunov exponent Step wise regression analysis +Normalizing+ Dynamic learning algorithm based clustering Auto-regression testing Auto-regression testing BP Genetic algorithm (GA) BP BP vary Temporal BP. Profitability MSE RMSE . MAE.correct down trend (CD) . correct up trend (CP) NMSE. SVR Performance measures RMSE. Particle-swarm optimization (PSO)+ adaptive recursive least-squares Adaptive BP BP Learning Algorithm with Adaptive Forgetting Factors BP + Adaptive Smoothing+ Momentum Terms GA SVR SVR Multilayer perceptron (MLP).DS.WDS Not specified NMSE. Native Bayesian classiﬁer Fisher linear classiﬁer Type 2 fuzzy time series model. Gradient NMSE. ICA Normalized Network type SVM Training method Support vector regression(SVR) Constructive learning algorithm Benchmark models Random walk (RW). Standard BPNN Four different networks with modified back propagation for each GA-ANN RW . DS.RNN RBF [8] [9] [10] [11] [12] [13] Grey Relational Analysis Euclidean distance based partitioning Rescaled range analysis Rescaled range analysis+ Normalizing+ sensitive analysis Normalizing+ Hurst exponent Phase Diagrams. Extended Kalman ﬁlter. DS. RMSE. DS . N ) Genetic programming prediction. linear discriminant analysis. Sign statistics Average error rate False alarms MAD. MAE Hit ratio Error ratio . Decision tree.PSO. MAPE. Garman–Kohlhagen model RMSE Frequency of correct prediction NMSE.MAPE. Ridge Polynomial Neural Network (RPNN) ANN. MAE MSE [27] [28] [29] [30] [31] Normalize.ARIMA .MAE. ARIMA. GA-SVM ANN-SV.SVM NMSE. Fuzzy dual-factor timeseries Standard BP. Extended Kalman filter (EKF). MAPE MSE. SVM. SVM Auto regression integrated moving average(ARIMA) ARIMA 3-Benchmark models for profit calculation FFANN. LM-based learning. Directional change statistics (DS) NMSE.ANN. K-nearest neighbor. EKF-based learning. BPANN. Pi-Sigma Neural Network (PSNN).CP.DS. Correlation Dimension.TABLE II SUMMARY OF MODELING TECHNIQUES Article [6] Data preprocessing Normalize. Functional Link Neural Network (FLNN). Case based reasoning RBF optimized by GA . CD NMSE. Self-organizing feature maps Kohonen self-organizing map Z-score normalization method Normalize Extract indicators with better performance SVM FFANN SVM SVM RBF SVR BSE-30 SENSEX Three-layer BP neural network. Levenberg-Marquardt(LM)based learning.

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