Artificial

Intelligence
in Finance
A Python-Based Guide

Yves Hilpisch
 CHAPTER 6
AI-First Finance

A computation takes information and transforms it, implementing what mathemati‐

cians call a function….If you’re in possession of a function that inputs all the world’s
financial data and outputs the best stocks to buy, you’ll soon be extremely rich.
—Max Tegmark (2017)

This chapter sets out to combine data-driven finance with the machine learning
approach from the previous chapter. It only represents the beginning of this endeavor
in that, for the first time, neural networks are used to discover statistical inefficien‐
cies. “Efficient Markets” on page 186 discusses the efficient market hypothesis and
uses OLS regression to illustrate it based on financial time series data. “Market Pre‐
diction Based on Returns Data” on page 192 for the first time applies neural net‐
works, alongside OLS regression, to predict the future direction of a financial
instrument’s price (“market direction”). The analysis relies on returns data only.
“Market Prediction with More Features” on page 199 adds more features to the mix,
such as typical financial indicators. In this context, first results indicate that statistical
inefficiencies might indeed be present. This is confirmed in “Market Prediction Intra‐
day” on page 204, which works with intraday data as compared to end-of-day data.
Finally, “Conclusions” on page 205 discusses the effectiveness of big data in combina‐
tion with AI in certain domains and argues that AI-first, theory-free finance might
represent a way out of the theory fallacies in traditional finance.

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