Tim Chenoweth – A Multi-Component Nonlinear Prediction System for the S&P 500

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A Multi-Component Nonlinear Prediction

About this book

The proposed stock market prediction system is comprised of two preprocessing components, two specialized neural networks, and a decision rule base. First, the preprocessing components determine the most relevant features for stock market prediction, remove the noise, and separate the remaining patterns into two disjoint sets. Next, the two neural networks predict the market’s rate of return, with one network trained to recognize positive and the other negative returns. Finally, the decision rule base takes both return predictions and determines a buy/sell recommendation.

Daily and monthly experiments are conducted and performance measured by computing the annual rate of return and the return per trade. Comparison of the results achieved by the dual neural network system to that of the single neural network shows that the dual neural network system gives much larger returns with fewer trades. In addition, dual neural network experiments with the appropriately selected filtering and decision thresholds managed to achieve an almost twice larger annual rate of return when compared to that of the buy and hold strategy over a seventy month period. However, no claims are made that the proposed system is better than the buy and hold strategy when considering transaction costs.

Author: Tim Chenoweth

Tim Chenoweth is an Associate Professor of Information Technology at Boise State University. Before receiving his Ph.D. from Washington State University (1996), he was an active duty officer in the U.S. Coast Guard (1981-1989). His assignments included deck watch officer aboard U.S. Coast Guard Cutters Cambell and Yocona, IT department Coast Guard 11th district Headquarters, Long Beach Ca., and head of IT, Civil Engineering Department, Coast Guard Headquarters, Washington D.C. Prior to arriving at Boise State, he was an Assistant Professor in the Computer Information Systems department at Arizona State University (1996 to 2003).

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