Abstract

Big data analytic techniques associated with machine learning algorithms are playing an increasingly important role in various application fields, including stock market investment. However, few studies have focused on forecasting daily stock market returns, especially when using powerful machine learning techniques, such as deep neural networks (DNNs), to perform the analyses. DNNs employ various deep learning algorithms based on the combination of network structure, activation function, and model parameters, with their performance depending on the format of the data representation. This paper presents a comprehensive big data analytics process to predict the daily return direction of the SPDR S&P 500 ETF (ticker symbol: SPY) based on 60 financial and economic features. DNNs and traditional artificial neural networks (ANNs) are then deployed over the entire preprocessed but untransformed dataset, along with two datasets transformed via principal component analysis (PCA), to predict the daily direction of future stock market index returns. While controlling for overfitting, a pattern for the classification accuracy of the DNNs is detected and demonstrated as the number of the hidden layers increases gradually from 12 to 1000. Moreover, a set of hypothesis testing procedures are implemented on the classification, and the simulation results show that the DNNs using two PCA-represented datasets give significantly higher classification accuracy than those using the entire untransformed dataset, as well as several other hybrid machine learning algorithms. In addition, the trading strategies guided by the DNN classification process based on PCA-represented data perform slightly better than the others tested, including in a comparison against two standard benchmarks.

Department(s)

Engineering Management and Systems Engineering

Comments

The authors would like to acknowledge the Laboratory for Investment and Financial Engineering and the Department of Engineering Management and Systems Engineering at the Missouri University of Science and Technology for their financial support and the use of their facilities.

Keywords and Phrases

Daily stock return forecasting; Data representation; Deep neural networks (DNNs); Hybrid machine learning algorithms; Return direction classification; Trading strategies

International Standard Serial Number (ISSN)

2199-4730

Document Type

Article - Journal

Document Version

Final Version

File Type

text

Language(s)

English

Rights

© 2019 The Authors, All rights reserved.

Creative Commons Licensing

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 License.

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