Computational Economics (2021) 57:1–4

https://doi.org/10.1007/s10614-021-10094-w

Machine Learning in Economics and Finance

Periklis Gogas1 · Theophilos Papadimitriou1

Accepted: 8 January 2021 / Published online: 4 February 2021

© The Author(s), under exclusive licence to Springer Science+Business Media, LLC part of Springer Nature 2021

The term Machine Learning (ML) was introduced by Arthur Samuel while work-
ing for IBM in 1959, mainly to describe the pattern recognition tasks that delivered
the “learning” component on the pioneering then Artificial Intelligence (AI) sys-
tems. The concept of Artificial Intelligence was theoretically and tentatively inves-
tigated from the 1930’s though it was systematically studied after the famous Dart-
mouth Workshop of 1956 (Kline 2011). There, among other things, John McCarthy,
research fellow at MIT at that time, proposed the term Artificial Intelligence over
Cybernetics. In these early years, ML systems were only considered as part of a
wider AI system. Since then, the range of practical applications of Machine Learn-
ing has been very wide, outreaching the narrow limits defined by the AI framework.
Today, there are more autonomous ML systems than there are ML components in
AI architectures. The terms AI and ML are often abusively interchanged for many
reasons (trending, funding, or even ignorance), creating confusion to the non-expert.
A general rule of thumb is that if the system acts without intervention, then it is
probably AI. If the system classifies or forecasts through learning, then it is ML. The
learning process was well established in 1997 by Professor Tom M. Mitchel from
Carnegie Mellon University, in his famous quote from (1997) “A computer program
is said to learn from experience E with respect to some class of tasks T and perfor-
mance measure P if its performance at tasks in T, as measured by P, improves with
experience E”. Self-driving cars use AI systems, the automatic vision system that
identifies an imminent accident is ML.
During this scientific evolution, ML followed the fate of AI and experienced long
periods of low interest and low funding, often referred to as “AI winters”. None-
theless, the present period is quite different as the timing of recent technological
advances and the inception of new ML structures coincides ideally. Affordable par-
allel computing allowed the use of complex and demanding Deep Learning (DL)
architectures like Recurrent Neural Networks and Convolutive Neural Networks to
common applications. Moreover, algorithms such as Support Vector Machines and
Random Forests and techniques such as kernelization, bagging and boosting allowed
for the first time, the application of ML to relatively small datasets. In addition, the

* Periklis Gogas
[email protected]
1
Department of Economics, Democritus University of Thrace, Komotini, Greece

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availability of free open-source Deep Learning libraries (supported by commercial

giants) such as TensorFlow and PyTorch simplified the use of DL for everyone.
Machine Learning applied to economics problems can be traced back as early
as 1974 (Lee and Lee 1974) although just as a mere mention in the abstract. The
first paper that we came across actually applying a ML methodology exclusively
on an economics problem is the study of Wang et al. (1984). The paper adopts the
term AI, though it is most likely a misuse according to the distinction we made
above, and the correct term should have been ML. In 1988 White, published a paper
that involved a Neural Networks (NN) application to forecast the IBM daily stock
returns. Since then, the appearance of ML in Economics steadily increased. Initially,
it was applied in forecasting financial time series where long datasets are widely
available. ML systems from that era required—for efficient training—extensive data
sets that did not exist in other areas of economics. Furthermore, training was very
time-consuming due to the—comparatively—low processing power of the comput-
ers of the period. Today, the use of many new ML architectures that do not require
unreasonably long data sets, is an interesting and very promising avenue in Eco-
nomic forecasting. This is the case not only for financial problems but also macro-
economics or microeconomics applications where data sets are inherently limited in
size. As a result, recent ML applications in (for example) business cycles and reces-
sion forecasting seem very successful as compared to traditional empirical models.
Currently, we encounter new methodologies merging and combining Econometrics
with ML (i.e. Garch–SVM). Moreover, it is interesting how ML techniques and
empirical procedures such as Cross Validation are now popular and are steadily
adopted to traditional Econometrics methodologies.
The scope of this Special Issue was to publish state-of-the-art applications of
Machine Learning in the areas of Economics and Finance. The innovation of the
contributions lies either in the methodologies employed or the unique and inno-
vative application of these algorithms that provide new and significant empirical
insight in Economics. The Special Issue is composed of 17 papers with subjects
ranging from forecasting economic and financial variables to simulating a complete
stock market. Soybilgen and Yazgan tried to nowcast the US GDP growth, using
tree-based models. In the same path, Yoon, forecasted the GDP growth of Japan
using Random Forests and Gradient Boosting. Chen et al. used the GARCH model
to identify the determinants of the Bitcoin price, and performed directional forecast-
ing using Decision Trees and Support Vector Machines. Bouri et al. investigated
the Bitcoin as a hedging choice, in the wake of the US–China trade war using Ran-
dom Forests. Syriopoulos et al. tackled the problem of forecasting shipping prices
using Support Vector Machines. Yilmaz and Arabaci conducted a thorough com-
parison between ten ML models on forecasting three exchange rates and concluded
that the hybrid model fusing ARIMA and Long Short-Term Memory outperformed
the competition. Similarly, Chakraborty et al. proposed a novel hybrid method com-
bining ARIMA and Autoregressive NN to forecast the unemployment rate of seven
countries. Plakandaras et al. forecast the price of Gold by combining the EEMD
filtering method with the classic Support Vector Regression methodology. Follow-
ing the trend of textual analysis, Lima et al., explores the forecasting ability of the
textual features extracted from the FED minutes on the output growth. In the same

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Machine Learning in Economics and Finance 3

vein, Duarte et al. combined the forecasting power of financial news and historical
prices, to predict financial losses in the Brazilian stock market. A textual research
of 1160 Computational Economics papers was performed by Alexakis et al. using
the Latent Dirichlet Allocation, yielding 18 general topics of interest. Tsagris intro-
duced a novel algorithm termed PCHC for Bayesian inference and used it in two
cases: one involving credit card expenditures, and one the income level. Triebels
et al. formulated the bank liquidity needs using three Recurrent Neural Networks
architectures and data from the Mexican Banking Sector. The risk estimation of a
P2P lending market is investigated using a hybrid methodology combining Instance-
Based Learning and Neural Networks in Babaei and Bambad. The same problem is
investigated by Bussman et al. using Extreme Gradient Boosting and the Minimum
Spanning Tree of the Shapley values. Pesantez-Narvaez et al. proposed the Synthetic
Penalized Logitboost method based on weighting corrections to treat binary classifi-
cation. They tested the proposed methodology against four other Econometrics and
ML methods in the Home Mortgage Disclosure Act dataset. Lussange et al. created
and tested a multiagent stock market simulator, where each stock acts autonomously
using reinforcement learning.
We express our gratitude to all the researchers that trusted their studies in this
Special Issue. The space of a journal issue, unfortunately, is relatively limited to
cover all the submitted papers and we had to take some displeasing decisions. We
must thank the Editor-in-Chief, Professor Hans M. Amman for accepting our pro-
posal and helping us accomplish this guest editorship. We must also thank the valu-
able technical support provided by Naveen Parthiban.

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