Financial forecasting using support vector machines

  • Cao L
  • Tay F
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Abstract

The use of Support Vector Machines (SVMs) is studied in financial forecasting by comparing it with a multi-layer perceptron trained by the Back Propagation (BP) algorithm. SVMs forecast better than BP based on the criteria of Normalized Mean Square Error (NMSE), Mean Absolute Error (MAE), Directional Symmetry (DS), Correct Up (CP) trend and Correct Down (CD) trend. S&P 500 daily price index is used as the data set. Since there is no structured way to choose the free parameters of SVMs, the generalization error with respect to the free parameters of SVMs is investigated in this experiment. As illustrated in the experiment, they have little impact on the solution. Analysis of the experimental results demonstrates that it is advantageous to apply SVMs to forecast the financial time series.

Author-supplied keywords

  • back propagation algorithm
  • financial time series forecasting
  • generalization
  • multi-layer perceptron
  • support vector machines

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Authors

  • Lijuan Cao

  • FEH Tay

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