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Stock Indices Through Artificial Neural

Networks and Chaos Theory

Vinod K#1, Nasira G M*2,Haresh M Pandya#3

#1

Research Scholar, Department of Computer Science, Chikkanna Government Arts College, Tiruppur,

Tamilnadu, India

*2

Head, Department of Computer Applications, Chikkanna Government Arts College, Tiruppur, Tamilnadu,

India

#3

Associate Professor, Department of Physics, Chikkanna Government Arts College, Tiruppur, Tamilnadu India

Abstract - Financial markets are generally considered techniques [1] and time series analysis used for

as dynamic entities behaving in a random and chaotic forecasting the series, they fail when the series

manner posing a challenging problem to equity, becomes complex [2]. The stock market is non-linear

commodity and currency forecasters. Adoption and chaotic.

ofartificial neural network techniques to forecast such

financial marketshas been resorted to by many, B. Artificial Neural Network (ANN)

howeverwith many shortcomings. The present paper Artificial neural network techniques have become

proposes a new model to address the above via a popular for forecasting because of their non-

synthesis of integration of a live trading system, parametric approach and for their ability to learn when

marketcrash factors and liquidity parameters with the properly trained. Neural net- works have the ability to

help of chaos theory of physics and financial, find patterns and irregularities as well as detecting

technical analysis. multidimensional non-linear connections in data [3].

Keywords - ANN, Chaos theory, Stock Prediction, Artificial Neural networks outperform the

Integrated model. statisticaltechniques in forecasting stock prices [4]. It

is extremely useful for modelling dynamical systems

I. INTRODUCTION like the stock market, futures market, commodity

market and the currency market. The strengths of

A. Stock market fundamentals Artificial neural networks are its ability to solve data-

Stock market forecasting is based on fundamental and intensive problems, rapid prototyping, adaptation,

technical analysis. Fundamental analysis is a stock learning and scalability. Artificial neural networks

valuation method which uses economic and financial have been applied to diverse areas like Bankruptcy

analysis to predict stock price movements. forecasting, Image processing, Signal processing,

Fundamental analyst examines the current and future Healthcare, Drug development, Intrusion detection

health of the whole economy by analysing data like and in Communication.

money supply, interest rate, inflation and the financial The most popular architecture applying for financial

data of the company like Price/Earnings ratio, book to market is the multilayer feed-forward neural networks.

the market ratio, dividend yield. Generally (Fig. 1) A standard Neural Network has at least three

fundamental analysis is suitable for long term layers. The first layer is called the input layer. The last

investors who have a buy and hold strategy. Technical layer is called the output layer. An intermediary layer

analysis is based on the premise that patterns repeat of nodes, the hidden layer, separates the input from the

regularly and makeuse of past patterns to predict the output layer. The number of nodes defines the amount

future. Technical analysis is specifically important for of complexity the model is capable of fitting. Each

traders with very short time horizon (could be intra- node of one layer has connections to all the other

day, couple of days or few weeks). In both the nodes of the next layer. The term back propagation

methods neural networks have been effectively used to is a form of supervised learning which trainsthe neural

forecast. Anyone who is trading in the market will network. Weights of various layers are adjusted

have a strong opinion that the market is chaotic and backwards from the output layer back to the input

random and the market is affected by a number of layer.

factors. Statistical tools like multiple regression

International Journal of Computer & Organization Trends (IJCOT)Volume 35 Number1 September 2016

computational approach using neural network model

to predict S & P Nifty 50 index was proposed. Based

on various studies of the network model, an optimal

model is proposed for forecasting. The model has been

validated across4 years of the trading days. The

highest performance predicted is 89.65% with the

average accuracy of 69.72% over a period of 4 years.

H.B.Kekre, Hitesh MakhijaPallavi H Halarnkar in

2014 [14] proposed a system which predicts the next

day closing price of the stock where the learning

algorithm used error back propagation learning

algorithm. The artificial neural network used is the

Figure 1. Multilayer Feed Forward Neural network

feed forward artificial network.

II. REVIEW OF LITERATURE

A. ANN Model Development

Youngohc Yoon and George Swales in 1991 [5]

In the review of current literature, it is amply clear that

developed a neural network which is capable of

artificial neural network can predict the stock market

learning and concluded that neural network approach

in short term wherein many models support that.

can significantly better thepredictability of stock price

performance. Qing Cao, Karyl B Leggio, Marc J 1) Selvan Simon and Arun Rout [15] analyzed

Schniderjans in 2005 [6] used Artificial Neural competitive ANN model and in improving ANN

Networks to predict stock price movement (price accuracy in Stock Market forecasting. The factors

return) for firms traded on the Shanghai Stock considered in improving the accuracy of relevant

Exchange and compared the predictive power of ANN model is by comparing various ANN models, its

univariate and multivariate neural network models and learning algorithm most suitable for the given

result shows that neural network outperforms the application, prediction target and problem situation to

linear models. GouttamDatta, Pankaj Jha, Arnab get the best result. It is also possible to combine

Kumar Laha&Neeraj Mohan in 2006 [7] discuss the special algorithms like genetic algorithms heuristic

modeling of the Indian stock market data using algorithms with ANN for de noising, selecting and

Artificial Neural Network and studied the efficiency optimizing parameters to improve accuracy of ANN

of Artificial Neural network in Bombay Stock model.

exchange. Chakaradhara panda and V Narasimhan

in2006 [8] used the Artificial Neural Network for 2) Thenmozhi [16] applied neural networks to predict

forecasting of daily Bombay Stock Exchange (BSE) daily returns of the Bombay Stock exchange. The

sensitive index (sensex) returns and compare the author did a sensitivity analysis to find out the relative

performance of random walk and lin- ear auto importance of each input and output. It was found that

regressive models by using six performance measures. the predictive power was influenced by previous day

Dase R K and Pawar D D [9] made a comprehensive price as a primary parameter to influence the

review of neural network literature during the period prediction

1991-2010 and tried to sum up that artificial neural 3) In [17] the study of BIST-100 index predictability

network has the ability to predict stock market index. during July 2007 - December 2009 crisis has been

Serge Hayward in 2006 [10] proposed an Agent based investigated using ANN. According to the results,

modeling with wavelets and an evolutionary artificial ANN is quite successfully in predicting Index

neural network and applied to CAC 40 forecasting and direction. The results obtained also suggest that ANN

the results demonstrate improved abilities of EANN to can foresee next day and next week values with an

learn information from signals decomposed on accuracy margin error of less than 5% even for

different frequencies. Sorin Vlad, Paul Pascu and unknown samples. The outcome is very important for

NicolaeMorariu in 2010 [11] discuss nonlinear models investors, especially in periods huge economic

andapply chaos in forecasting exchange rates and fragility like financial crises.

conclude that short term prediction can be made.

Prakash Ramani and P D Mururka in 2013 [12]

proposed use of method for stock price prediction

using ANN and back propagation algorithm.

International Journal of Computer & Organization Trends (IJCOT)Volume 35 Number1 September 2016

Training ANN with stock market data involves Pre of investors in the stock market by offering more

and post data processing issues such as selecting, accurate stock prediction compared to existing

sampling, cleaning, filtering, de noising, normalizing, technical analysis based approach. The strategies for

deseasonalising, validating, optimizing data for improving accuracy are hybrid analysis, choice of

training ANN, for stock market data. The selection of inputs, training ANN with stock market data and ANN

appropriate number of hidden layers, number of component optimization. Although ANN are popular

neurons in each layer, size of the training set, initial their use in real world scenarios for making trading

values for weights, inputs to be included, activation profits is still under studied. One feature to assess the

function arethe key design issues of a ANN model. quality of ANN model development is to integrate the

Parameter setting should be done by hit and trial ANN to a live trading system. An automated trading

method. Targets in ANN stock market models should system is required where the predictions are converted

be considered along with the target application. For into buy and sell decisions for both day-trade, weekly

example, stock market trend prediction and stock and long term trade. One of the problems associated

market prediction may require different ANN models with classical ANN stock forecasting models are that

and data. Targets in the stock market may be they are not able to forecast crashes which could be

predicting market indices, market trend, market great profit making opportunities for investors. It is

volatility, buy-hold-sell, high- low risk-return necessary that the ANN have that capability. Liquidity

classification, best to worst stock for trading strategy factor also plays an important role in the markets

and so on. The forecasting may be for long term, short because the market has got integrated. Any boom or

term, given period, or instant. It may be for a stock or crisis in any part of the globe has wide ramifications

a sector. Identifying the most suitable ANN model and across global markets. Moreover, hedge fund activity,

data for a specific prediction target will enhance the foreign institutional investors (FIIs) are an important

accuracy. Further one can divide the complex stock factor, so we have considered variables like FII inflow

market prediction tasks into simpler subtasks, perform short term currency movements.

the task and integrate the results to get better

performance In these direction the proposed new hybrid model

forpredictions is done through integrating three ANN

blocks

analysis block ANN23) Liquidity condition ANN3

Figure 2. Block Diagram for ANN1 ANN1 is based on the premise that future price

depends on the previous price.ANN1 Technical

analyst network will give an output forecast for the

index Min and Max price targets for the day for

NIFTY. ANN2 is the fundamental analysis block

which will have macroeconomic variables like GDP,

inflation, interest rate, gold and oil prices, money

supply and other variables which can be given by the

user. The network is represented in Fig 3.

monthforecast. It gives a maximum and minimum for

the time duration selected. ANN3 is based on the

liquidity factor available for the day. Integrating the

Figure 3. Block Diagram for ANN2 results obtained by ANN1, ANN2 and ANN3 we

employ chaos modelling Over a period of time under

By applying more than one data mining techniques,

supervised learning the neural network will learn

say genetic algorithm and neural networks on two

when it is deterministic or random dominates and

different subtasks, we can take the advantages of their

makes a forecast of future index which can be

strengths. The empirical results obtained shows high

integrated to live trading. Asper the literatureand

level of accuracy for daily stock price prediction with

findingsthis approachof integrationof technical,

hybridized approach performing better than technical

fundamental and liquidity based models are not found

analysis approach [15]. The hybridized approach has

in any literature. In this proposed neural network

the potential to enhance the quality of decision making

architecture, we have considered to integrate

International Journal of Computer & Organization Trends (IJCOT)Volume 35 Number1 September 2016

majority of ANNs system proposed and implemented

are evaluated using classical model prediction metrics Gold price

like mean absolute error (MAE) or the mean squared Oil price

errors (MSE). Metrics like MAE or MSE gives an idea

of model generalization, but do not give direction in Other data as defined by the user.

the behaviourof the system in the real market.

3) Derived data: By transforming and combining

Integrating various analysis techniques like technical,

technical and or/fundamental data

fundamental and liquidity into prediction process is

supposed to give excellent forecasting results. Algorithm for ANN1

IV. METHODOLOGY Step1: Acquiring the Historical NIFTY data (from

www.nseindia.com in csv format) Collect the

A.Chaos theory

historical data and other values needed as input

Chaos theory approach can be applied to model non- parameters.

linear dynamic systems. We assume part of the

Step2: Selection of features like Open price, close,

process to bedeter- ministic and part random. It is an

high, low etc.,

attempt to show that order exists in apparent

randomness. Chaos theory contradicts EMH but Step3: Artificial neural network model to predict.

implying stock market is chaotic and not simply

random. A chaotic system is a combination of Step4: Prediction of Next day High and low for Nifty.

deterministic and a random process. The deterministic The input for ANN2 are Gold price, Oil price,

process can be characterized by regression fitting, and inflation, trading volume and other macroeconomic

the random process can be characterized by statistical data as specified by the user.

parameters of a distribution function. The future share

The output will be weekly forecast, Monthly forecast

price depends both on the past price (technical analyst

and 3month forecast for NIFTY index.

view) and can be written as [11].

ANN3 will have FII inflow (historical) and Currency

p (t + 1) = f (p (t n)) (1)

rates, other stock indices like (Dow jones index,

Where f is a non-linear function, and on a series FTSE, CAC, etc ). More weightage will be for the

offundamental economic variables (fundamentalist previous day data.

view).

V. CONCLUSIONS

p (t + 1) = g (Z) (2)

It is extremely challenging to predict the stock market.

Where Z= (Y, MP. . .) being macroeconomic variables In the review of literature, it is clear Artificial Neural

likeGDP, inflation and interest rate. The exact form of networks have the ability to predict stock market index

f (p (t-n)) is unknown and the neural network by and they are superior to statistical techniques.

learning will capture the form. Under certain Emphasis should be on an empirical approach where

conditions the equation becomes logistic equation, one first seeks to uncover features of the complex

which is known to have chaotic behaviour and during economy. Short term prediction is possible as

periods of stability it becomes linear. Over a period of demonstrated by various ANN models. Hybrid ANN

time under supervised learning the neural network will integrating fundamental, technical and liquidity

learn which one is deterministic or random dominates combined with Chaos theory may be the right

the equation and makes a forecast of future price. architecture for forecasting and trading in the real

market. We will implement the proposed model for

Data related to the market. the NIFTY index in the next paper.

1) Technical data include REFERENCES

The NIFTY opening and closing at the end of the [1] E. M. Azoff, Neural network time series forecasting of financial

day market.John Wiley & Sons Ltd, 1994.

[2] C.M.Bishop, Neural Networks for pattern Recognition. Oxford

The highest and the lowest NIFTY of a trading day Uni- versity press, 1995.

[3] Z.Yudong and W.Lenan, Stock market prediction of s &p 500

2) Fundamental data include via combination of improved bco approach and bp neural network,

2008.

Inflation [4] K. S. Vaisla, D. A. K. Bhatt, and S. Kumar, Stock market

forecasting using artificial neural network andstatistical technique a

International Journal of Computer & Organization Trends (IJCOT)Volume 35 Number1 September 2016

Security, vol. 2, no. 8, August 2010.

[5] Y. Yoon and G. Swales, Proceedings of the IEEE International

confer- ence on neural networks, no. 156 - 162, 1991.

[6] Q. Cao, K. B. Leggio, and M. J. Schniederjans, Computers and

Oper- ations Research, vol. 32, 2005.

[7] G. Dutta, P. Jha, A. Kumar, and N. Mohan, Journal of Emerging

market Finance, vol. 5, no. 3, pp. 283 295.

[8] C. panda and Narasimhan V, South Asia journal of Economics,

vol. 7, no. 2, pp. 205 218.

[9] D. R. K and P. DD, Application of artificial neural network for

stock market predictions: A reviewof literature, International

Journal of Machine Intelligence, vol. 2, pp. 14 17, 2010.

[10] S. Hayward, Agent based modelling with wavelets and an

evolutionary artificial neural network: Applications to CAC

forecasting, in Econo- physics of Stock and other markets,

Proceedings ofthe Econophys, Kolkata, June 2006.

[11] P. P. Sorin Vlad and N. Morariu, Chaos models in

economics, Journal of Computing, vol. 2, no. 1, 2010.

[12] P.Ramani and P. D. Murarka, Stock market prediction using

artificial neural network, International Journal of Advanced

research in Computer Science and Software engineering, vol. 3, pp.

873 877, 2013.

[13] M. M.Majumdar, Forecasting of Indian Stock Market Index

using Artificial Neural Network. [Online]. Available:

www.nseindia.com/ content/research/finalpaper206.pdf

[14] H.B.Kekre, H. Makhija, and P.N.Halarnkar, Prediction of

closing price of stock using artificial neural network, International

Journal of Scientific & Engineering Research, vol. 5, no. 3, 2014.

[15] S. Simon and A. Raoot, Accuracy driven artificial neural

networks in stock market prediction, International Journal on Soft

computing, vol. 3, no. 2, May 2012.

[16] M.Thenmozhi, Forecasting stock index returns using neural

networks, vol. 7, no. 2, pp. 59 69, 2006.

[17] S. S. et.al, Stock market index prediction with neural network

during financial crises, Financial Risk and Management Reviews,

vol. 1, no. 2, pp. 53 67, 2015

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