83 research outputs found
Predicting Daily Probability Distributions Of S&P500 Returns
Most approaches in forecasting merely try to predict the next value of the time series.
In contrast, this paper presents a framework to predict the full probability distribution. It
is expressed as a mixture model: the dynamics of the individual states is modeled with so-called
"experts" (potentially nonlinear neural networks), and the dynamics between the states is modeled
using a hidden Markov approach. The full density predictions are obtained by a weighted superposition
of the individual densities of each expert. This model class is called "hidden Markov experts".
Results are presented for daily S&P500 data. While the predictive accuracy of the mean does
not improve over simpler models, evaluating the prediction of the full density shows a clear out-of-sample
improvement both over a simple GARCH(1,l) model (which assumes Gaussian distributed
returns) and over a "gated experts" model (which expresses the weighting for each state non-recursively
as a function of external inputs). Several interpretations are given: the blending of
supervised and unsupervised learning, the discovery of hidden states, the combination of forecasts,
the specialization of experts, the removal of outliers, and the persistence of volatility.Information Systems Working Papers Serie
A First Application of Independent Component Analysis to Extracting Structure from Stock Returns
This paper discusses the application of a modern signal processing technique known as independent
component analysis (ICA) or blind source separation to multivariate financial time series such as a
portfolio of stocks. The key idea of ICA is to linearly map the observed multivariate time series into a new
space of statistically independent components (ICs). This can be viewed as a factorization of the portfolio
since joint probabilities become simple products in the coordinate system of the ICs.
We apply ICA to three years of daily returns of the 28 largest Japanese stocks and compare the results with
those obtained using principal component analysis. The results indicate that the estimated ICs fall into two
categories, (i) infrequent but large shocks (responsible for the major changes in the stock prices), and (ii)
frequent smaller fluctuations (contributing little to the overall level of the stocks). We show that the overall
stock price can be reconstructed surprisingly well by using a small number of thresholded weighted ICs.
In contrast, when using shocks derived from principal components instead of independent components, the
reconstructed price is less similar to the original one. Independent component analysis is a potentially powerful
method of analyzing and understanding driving mechanisms in financial markets. There are further
promising applications to risk management since ICA focuses on higher-order statistics.Information Systems Working Papers Serie
Predicting Daily Probability Distributions Of S&P500 Returns
Most approaches in forecasting merely try to predict the next value of the time series.
In contrast, this paper presents a framework to predict the full probability distribution. It
is expressed as a mixture model: the dynamics of the individual states is modeled with so-called
"experts" (potentially nonlinear neural networks), and the dynamics between the states is modeled
using a hidden Markov approach. The full density predictions are obtained by a weighted superposition
of the individual densities of each expert. This model class is called "hidden Markov experts".
Results are presented for daily S&P500 data. While the predictive accuracy of the mean does
not improve over simpler models, evaluating the prediction of the full density shows a clear out-of-sample
improvement both over a simple GARCH(1,l) model (which assumes Gaussian distributed
returns) and over a "gated experts" model (which expresses the weighting for each state non-recursively
as a function of external inputs). Several interpretations are given: the blending of
supervised and unsupervised learning, the discovery of hidden states, the combination of forecasts,
the specialization of experts, the removal of outliers, and the persistence of volatility.Information Systems Working Papers Serie
A First Application of Independent Component Analysis to Extracting Structure from Stock Returns
This paper discusses the application of a modern signal processing technique known as independent
component analysis (ICA) or blind source separation to multivariate financial time series such as a
portfolio of stocks. The key idea of ICA is to linearly map the observed multivariate time series into a new
space of statistically independent components (ICs). This can be viewed as a factorization of the portfolio
since joint probabilities become simple products in the coordinate system of the ICs.
We apply ICA to three years of daily returns of the 28 largest Japanese stocks and compare the results with
those obtained using principal component analysis. The results indicate that the estimated ICs fall into two
categories, (i) infrequent but large shocks (responsible for the major changes in the stock prices), and (ii)
frequent smaller fluctuations (contributing little to the overall level of the stocks). We show that the overall
stock price can be reconstructed surprisingly well by using a small number of thresholded weighted ICs.
In contrast, when using shocks derived from principal components instead of independent components, the
reconstructed price is less similar to the original one. Independent component analysis is a potentially powerful
method of analyzing and understanding driving mechanisms in financial markets. There are further
promising applications to risk management since ICA focuses on higher-order statistics.Information Systems Working Papers Serie
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