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Financial Time Series Forecasting Using Support Vector Machines

The document discusses using support vector machines (SVM) for financial time series forecasting. It introduces SVM, outlines the experimental settings which included tuning the error cost C and kernel parameter δ2, and analyzes the results. The SVM approach outperformed backpropagation neural networks and case-based reasoning due to SVM's ability to minimize structural risk. However, parameter tuning was still an issue.

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Nguyễn Chiến
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36 views21 pages

Financial Time Series Forecasting Using Support Vector Machines

The document discusses using support vector machines (SVM) for financial time series forecasting. It introduces SVM, outlines the experimental settings which included tuning the error cost C and kernel parameter δ2, and analyzes the results. The SVM approach outperformed backpropagation neural networks and case-based reasoning due to SVM's ability to minimize structural risk. However, parameter tuning was still an issue.

Uploaded by

Nguyễn Chiến
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Financial time series forecasting

using support
vector machines
Author: Kyoung-jae Kim
2003 Elsevier B.V.
Outline
• Introduction to SVM
• Introduction to datasets
• Experimental settings
• Analysis of experimental results
Linear separability
• Linear separability
– In general, two groups are linearly separable in n-
dimensional space if they can be separated by an
(n − 1)-dimensional hyperplane.
Support Vector Machines
• Maximum-margin hyperplane
maximum-margin hyperplane
Formalization
• Training data

• Hyperplane

• Parallel bounding hyperplanes


Objective
• Minimize (in w, b)
||w||
• subject to (for any i=1, …, n)
A 2-D case
• In 2-D:
– Training data:
-2x+2y+1=0
-2x+2y+1=1
xi ci
-2x+2y+1=-1
<1, 1> 1
<2, 2> 1
<2, 1> -1 w=<-2, 2>
b=-1
<3, 2> -1 margin=sqrt(2)/2
Not linear separable
• No hyperplane can separate the two groups
Soft Margin
• Choose a hyperplane that splits the examples
as cleanly as possible
• Still maximizing the distance to the nearest
cleanly split examples
• Introduce an error cost C
d*C
Higher dimensions
• Separation might be easier
Kernel Trick
• Build maximal margin hyperplanes in high-
dimenisonal feature space depends on inner
product: more cost
• Use a kernel function that lives in low
dimensions, but behaves like an inner product
in high dimensions
Kernels
• Polynomial
– K(p, q) = (p•q + c)d
• Radial basis function
– K(p, q) = exp(-γ||p-q||2)
• Gaussian radial basis
– K(p, q) = exp(-||p-q||2/2δ2)
Tuning parameters
• Error weight
–C
• Kernel parameters
– δ2
–d
– c0
Underfitting & Overfitting
• Underfitting

• Overfitting

• High generalization ability


Datasets
• Input variables
– 12 technical indicators
• Target attribute
– Korea composite stock price index (KOSPI)
• 2928 trading days
– 80% for training, 20% for holdout
Settings (1/3)
• SVM
– kernels
• polynomial kernel
• Gaussian radial basis function
– δ2
– error cost C
Settings (2/3)
• BP-Network
– layers
• 3
– number of hidden nodes
• 6, 12, 24
– learning epochs per training example
• 50, 100, 200
– learning rate
• 0.1
– momentum
• 0.1
– input nodes
• 12
Settings (3/3)
• Case-Based Reasoning
– k-NN
• k = 1, 2, 3, 4, 5
– distance evaluation
• Euclidean distance
Experimental results
• The results of SVMs with various C where δ2 is fixed
at 25
• Too small C
• underfitting*
• Too large C
• overfitting*

* F.E.H. Tay, L. Cao, Application of support vector machines in -nancial time series forecasting, Omega 29 (2001) 309–317
Experimental results
• The results of SVMs with various δ2 where C is fixed
at 78
• Small value of δ2
• overfitting*
• Large value of δ2
• underfitting*

* F.E.H. Tay, L. Cao, Application of support vector machines in -nancial time series forecasting, Omega 29 (2001) 309–317
Experimental results and conclusion
• SVM outperformes BPN and CBR
• SVM minimizes structural risk
• SVM provides a promising alternative for
financial time-series forecasting
• Issues
– parameter tuning

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