Practical machine learning: Forecasting daily financial markets directions

• Published in: Expert systems with applications 2023-12, Vol.233, p.120840, Article 120840
• Main Authors: Henrique, Bruno Miranda, Sobreiro, Vinicius Amorim, Kimura, Herbert
• Format: Article
• Language: English
• Subjects: Developing markets; Financial time series prediction; Machine learning; Stock markets
• ISSN: 0957-4174; 1873-6793
• DOI: 10.1016/j.eswa.2023.120840

Financial time series prediction has many applications in economics, but producing profitable strategies certainly has a special place among them, a daunting challenge. Statistical and machine learning techniques are intensively researched in the search for a holy grail of stock markets forecasting. However, it is not clear to prospecting researchers how good those popular models are regarding useful predictions on a real scenario. This paper contributes to that discussion, providing decisive evidences contrary to the use of basic out-of-the-box models, specifically Artificial Neural Networks (ANN), Support Vector Machines (SVM), Random Forest (RF) and Naive-Bayes (NB). Results consider optimistic and unreal variables often found in literature, as well as a more close-to-real simulation of the models usage. Specifically, current day closing prices direction forecasting results are contrasted with those on next day forecasts. As expected, when forecasting the current day, accuracy is almost perfect. However, when used to forecast next day closing direction, with a strict data separation policy and without direction or snooping bias, ANN, SVM, RF and NB produce results essentially equal to random guessing. The main achieved result is the demonstration of how a machine learning approach would fare in a support decision system for forecasting short-term future market direction, regardless of the level of market development, considering more than 100 securities in a 10 years period. Consequences for algorithmic trading relate to discouraging usage of the considered models as implemented here. On a more abstract sense, this paper presents more evidence to the Efficient Market Hypothesis (EMH).