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Economic Modelling

journal homepage: www.elsevier.com/locate/ecmod

PSO-based high order time invariant fuzzy time series method: Application to stock

exchange data

Erol Egrioglu

Ondokuz Mays University, Department of Statistics, Turkey

a r t i c l e

i n f o

Article history:

Accepted 18 February 2014

Available online xxxx

Keywords:

Fuzzy time series

Particle swarm optimization

Fuzzy c-means

Forecasting

Dene fuzzy relation

a b s t r a c t

Fuzzy time series methods are effective techniques to forecast time series. Fuzzy time series methods are based

on fuzzy set theory. In the early years, classical fuzzy set operations were used in the fuzzy time series methods. In

recent years, articial intelligence techniques have been used in different stages of fuzzy time series methods. In

this paper, a novel fuzzy time series method which is based on particle swarm optimization is proposed. A high

order fuzzy time series forecasting model is used in the proposed method. In the proposed method, determination of fuzzy relations is performed by estimating the optimal fuzzy relation matrix. The performance of the proposed method is compared to some methods in the literature by using three real world time series. It is shown

that the proposed method has better performance than other methods in the literature.

2014 Elsevier B.V. All rights reserved.

1. Introduction

Fuzzy time series methods have different approaches to uncertainty

from probabilistic statistical methods. Classical time series analysis

methods are probabilistic methods, and they need some strict assumptions. Moreover, probabilistic methods don't take into consideration

fuzziness. However, some real life time series contain fuzziness. Because

of this fact, various fuzzy time series methods were proposed in the literature. Fuzzy time series methods do not need any assumptions like

normality and linearity.

Fuzzy time series methods were rst dened in Song and Chissom

(1993a). First denitions and methods were based on fuzzy set theory

and some fuzzy set operations. Song and Chissom (1993a) dened

two different fuzzy time series types: time variant and time invariant.

The rst time invariant fuzzy time series method was proposed in

Song and Chissom (1993b). There have been a lot of studies about

time invariant fuzzy time series in the literature. But there have been

a limited number of studies about time variant fuzzy time series.

When fuzzy time series methods are examined, it can be said that

they consist of three stages: fuzzication, determining fuzzy relation

and defuzzication. Fuzzy time series methods are based on different

forecasting models. The forecasting models can be rst order or high

order. When the rst order models are used, it is assumed that fuzzy

time series is caused by one order lagged fuzzy time series. Similarly,

when nth order fuzzy time series forecasting model is used, fuzzy

time series are caused by 1,2,,n order lagged fuzzy time series.

In the literature, many methods are used for determining fuzzy relations. These methods are using fuzzy logic group relation tables, articial neural networks, fuzzy relation matrices obtained from some

fuzzy set operations, particle swarm optimization and genetic

algorithms. Chen (1996, 2002), Lee et al. (2007, 2008), Duru et al.

(2010), Lee et al. (2013), Uslu et al. (2013), Bulut (2014) and Chen

and Chen (2014) used fuzzy logic group relation tables. Aladag et al.

(2009), Egrioglu et al. (2009a,b), Yolcu et al. (2013) and Aladag

(2013) used some type of articial neural networks. Song and

Chissom (1993b, 1994) used a fuzzy relation matrix obtained from

some fuzzy set operations. Egrioglu (2012) used a fuzzy relation matrix

obtained from a genetic algorithm and Aladag et al. (2012) used a fuzzy

relation matrix obtained from particle swarm optimization. Aladag et al.

(2012) and Egrioglu (2012) methods are based on rst order fuzzy time

series forecasting models. The high order models are needed to forecast

many real life time series. Chen (2002), Lee et al. (2007, 2008), Kuo et al.

(2009, 2010), Park et al. (2010), Chen and Chung (2006), Hsu et al.

(2010), Egrioglu et al. (2009a,b, 2010), Aladag et al. (2009), Chen

(2013), Qiu et al. (2013), and Jilani and Burney (2008) studies are

based on the high order fuzzy time series forecasting model. Some

methods which are used to determine fuzzy relations didn't take into

consideration membership values of fuzzy sets. Song and Chissom

(1993b), Yolcu et al. (2013), Yu and Huarng (2010), Egrioglu (2012)

and Aladag et al. (2012) papers took into consideration membership

values of fuzzy sets.

In this study, a novel fuzzy time series method is proposed. The proposed method uses the fuzzy c-mean method in fuzzication stage, and

the particle swarm optimization method in the determining fuzzy relation stage. The proposed method is based on the high order fuzzy time

series forecasting model. The proposed method is an improved version

of the Aladag et al. (2012) method. Aladag et al. (2012) was based on

the rst order fuzzy time series forecasting model as distinct from the

proposed method. Particle swarm optimization is summarized in the

second section of this paper. In the third section, the particulars of the

proposed method are given. The application results are given in the fourth

section. The results are discussed in the last section of the paper.

http://dx.doi.org/10.1016/j.econmod.2014.02.017

0264-9993/ 2014 Elsevier B.V. All rights reserved.

Please cite this article as: Egrioglu, E., PSO-based high order time invariant fuzzy time series method: Application to stock exchange data, Econ.

Model. (2014), http://dx.doi.org/10.1016/j.econmod.2014.02.017

Particle swarm optimization, which is an articial intelligence technique, was rstly proposed by Kenedy and Eberhart (1995). There have

been different versions of particle swarm optimization in the literature.

Shi and Eberhart (1999) used time varying inertia weight and Ma et al.

(2006) used time varying acceleration coefcients in their algorithm. An

algorithm which uses time varying inertia weight and a time varying acceleration coefcient is given below. We called this algorithm modied

particle swarm optimization. This algorithm was rstly used in Aladag

et al. (2012).

Step 4. Let c1 and c2 represent cognitive and social coefcients, respectively, and w is the inertia parameter. Let (c1i, c1f), (c2i, c2f), and

(w1, w2) be the intervals which include possible values for c1, c2

and w, respectively. In each iteration, these parameters are calculated by using the formulas given in Eqs. (5), (6) and (7).

c1 c1 f c1i

t

c1i

maxt

maxtt

c2i

c2 c2 f c2i

maxt

maxtt

w1

maxt

Step 1. Positions of each kth (k = 1,2, , pn) particle's positions are

randomly determined and kept in a Xk given as follows:

n

o

X k xk;1 ; xk;2 ; ; xk;d ; k 1; 2; ; pn

pn and d represent the number of particles in a swarm and positions in a particle, respectively.

Step 2. Velocities are randomly determined and stored in a vector Vk

given below.

n

o

V k vk;1 ; vk;2 ; ; vk;d ; k 1; 2; ; pn:

given in Eqs. (1) and (2), respectively, are determined.

Pbest k pk;1 ; pk;2 ; ; pk;d ; k 1; 2; ; pn

Gbest pg;1 ; pg;2 ; ; pg;d

the kth particle's best individual performance, and Gbest represents the best particle, which has the best evaluation function

value found so far.

w w2 w1

and the current iteration number, respectively.

Step 5. Values of velocities and positions are updated by using the formulas given in Eqs. (8) and (9), respectively.

h

i

t1

t

t

t

vi; j w vi; j c1 rand1 pi; j xi; j c2 rand2 pg; j xi; j

t1

t1

where rand1 and rand2 are generated random values from the

interval [0,1].

Step 6. Steps 3 to 5 are repeated until a predetermined maximum iteration number (maxt) is reached.

3. The proposed method

There have been a lot of studies about fuzzy time series methods in

the literature. The most important differences in fuzzy time series

methods from classical methods are membership values and the advantages of membership values. Although the defuzzication process is

performed in the fuzzy time series methods, obtaining fuzzy forecasts

Please cite this article as: Egrioglu, E., PSO-based high order time invariant fuzzy time series method: Application to stock exchange data, Econ.

Model. (2014), http://dx.doi.org/10.1016/j.econmod.2014.02.017

some studies didn't take into consideration these membership values in

the determination of fuzzy relation stage. Aladag et al. (2012) proposed

a fuzzy time series method which is based on particle swarm optimization. The Aladag et al. (2012) method used the rst order fuzzy time series forecasting method. Better quality forecasts can be obtained from

high order models instead of rst order models. The high order fuzzy

time series forecasting model is dened as below.

Denition. Let F(t) be a time invariant fuzzy time series. If F(t) is caused

by F(t 1), F(t 2), , and F(t n) then this fuzzy logical relationship

is represented by

F tn; ; F t2; F t1 F t

10

and it is called the nth order fuzzy time series forecasting model.

To obtain forecasts from a high order model (10) can be used in intersection operations. After R fuzzy relation matrix is obtained, fuzzy

forecasts can be calculated by using Eq. (11).

F t F tn F t2 F t1R

11

maxmin compositions and union operations in Song and Chissom

(1993b). These operations were very complex and time consuming in

Song and Chissom (1993b).

Model (10) is used in the proposed novel fuzzy time series forecasting method. The novel method is an improved version to high order

models of Aladag et al. (2012). The proposed method is using the

fuzzy c-mean method that was proposed in Bezdek (1981) in the

fuzzication stage, and the particle swarm optimization method in the

determining fuzzy relation stage. Some advantages of the proposed

method are listed below:

Because of using fuzzy c-means in fuzzication stage, there is no need

for subjective decisions like determining interval length.

The proposed method takes into consideration membership values.

Because R relation matrix is obtained from particle swarm optimization, there is no necessity for complex and time consuming matrix

operations.

Because the proposed method is based on the high order fuzzy time

series forecasting model, the better quality forecasts can be obtain

from the proposed method for real life time series.

proposed method is given in Fig. 1.

Algorithm 2.

Step 1. The parameters of the proposed method are determined. These

parameters are:

pn: Particle number of swarm

[c1i, c1f]: Cognitive coefcient interval

[c2i, c2f]: Social coefcient interval

maxt: Maximum iteration number

fsn: Number of fuzzy set

ntest: Observation number of test

n: Model order.

The root of mean square error (RMSE) is used as a tness function in the

proposed method. RMSE is calculated according to Eq. (12).

RMSE

r

1 Xn

^t 2

y y

t1 t

n

12

where yt, y

the number of forecasts, respectively.

Step 2. The fuzzy c-mean method is applied to the training data of time

series. The cluster centers of fsn fuzzy sets Lr (r = 1,2,,fsn) and

membership values of training data observations are obtained

by the fuzzy c-mean method. The fuzzy sets are redesigned according to the ascending ordered centers. The membership

values of test data observations are obtained from cluster centers which were determined for training data by fuzzy cmean. Fuzzy c-mean method is iteratively applied according to

the Bezdek (1981) procedure. First, the initial cluster centers

are simulated by the interval on which time series is dened.

The memberships are calculated according to Eq. (14).

Eqs. (13) and (14) are consecutively used.

n

X

vi

uij x j

j1

n

X

13

uij

j1

uij

1

12 =

0

1

fsn

d x j ; vi

X

@

A

d x j ; vk

k1

14

, xn are observations of training data and uij is membership

value of xj to ith fuzzy set. At the end of the FCM application processes, cluster centers vi(i = 1, 2, , c) and membership values

of training data observations to all fuzzy sets (uij, i = 1, 2, , c;

j = 1, 2, , n) are obtained. The cluster centers are sorted into

an ascending order and the membership values are arranged

by the sort of orders.

Step 3. Generate a random initial positions and velocities.

In the proposed method, positions are generated by uniform

distribution with (0,1) parameters. Velocities are generated

by uniform distribution with ( 1,1). There are pn particles

Please cite this article as: Egrioglu, E., PSO-based high order time invariant fuzzy time series method: Application to stock exchange data, Econ.

Model. (2014), http://dx.doi.org/10.1016/j.econmod.2014.02.017

Table 1

Forecasting results for IMKB data set.

Date

Test set

(1993b)

Chen (1996)

Huarng

(2001)a

Huarng

(2001)b

Huarng and Yu

(2006)

Cheng et al.

(2008)

Yolcu et al.

(2013)

Proposed

method

23.12.2008

24.12.2008

25.12.2008

26.12.2008

29.12.2008

30.12.2008

31.12.2008

26,294

26,055

26,059

26,499

26,424

26,411

26,864

RMSE

MAPE

MAE

26,410

26,410

26,410

26,410

26,410

26,410

26,410

261.01

0.75%

197.14

26,400

26,400

26,400

26,400

26,400

26,400

26,400

259.76

0.75%

198.57

26,200

26,200

26,200

26,200

26,200

26,200

26,200

310.47

0.96%

254

26,100

26,367

26,100

26,100

26,500

26,500

26,500

251.24

0.80%

210.71

26,091

26,091

26,091

26,091

26,608

26,608

26,091

354.72

0.98%

261.85

26,390

26,390

26,390

26,390

26,390

26,390

26,390

258.87

0.76%

200

26,274

26,273

26,339

26,337

26,565

26,429

26,460

219.27

0.67%

177.57

26,342

26,342

26,342

26,342

26,342

26,342

26,639

189.60

0.62%

164.42

a

b

Average based method.

the proposed method, positions of a particle are elements of

R fuzzy relation matrix. R fuzzy relation matrix has fsn columns and fsn rows and d = fsn fsn. Each fuzzy relation matrix (Ri, i = 1, 2, , pn) is obtained from each particle.

Step 4. Fitness (RMSE) values of the particles are calculated. In the

proposed method, Steps 4.1 and 4.4 are applied to calculate

the RMSE value for each particle.

Step 4.1. Ri fuzzy relation matrix is constituted from particle positions. The ith particle is shown in Fig. 2.

Then R matrix is designed from ith particle as below:

2

6

Ri 6

4

xi;1

xi;2

xi;fsn1

xi;fsn2

xi;fsn1fsn1

xi;fsn1fsn2

xi;fsn

xi;2fsn 7

7:

5

xi;fsnfsn

using Eq. (11). For example, let model order be 2,

fsn = 3, F(t 1) = [0.7 0.3 0], F(t 2) = [0.5 0.5 0] and

2

1 0:5

R 4 0:1 0

0:1 0

3

0:5

1 5:

1

F t F t2 F t1 R

2

^F t 0:5; 0:3; 0

4

1 0:5

0:1 0

0:1 0

3

0:5

1 5

1

max min0:5; 1; min0:3; 0:1; min0; 0:1

max min0:5; 0:5; min0:3; 0; min0; 0

max min0:5; 1; min0:3; 0:1; min0; 0:1

max0:5; 0:1; 0 max0:5; 0; 0 max0:5; 0:1; 0

^F t 0:5 0:5 0:5:

centers of fuzzy sets and membership values of fuzzy

forecasts are used for the defuzzication stage.

If the membership values of the fuzzy forecast have only one maximum, then take the center value of this set as the defuzzied forecasted value.

If membership values of fuzzy forecast have two or more consecutive maximums, then select the arithmetic mean of the centers of

the corresponding clusters as the defuzzied forecasted value.

Otherwise, standardize the fuzzy output and use the center of the

fuzzy sets as the forecasted value.

Step 4.4. RMSE value is calculated according to Eq. (12).

Step 5. According to RMSE, the Pbest and Gbest particles which are

given in Eqs. (3) and (4), respectively, are determined.

Step 6. Update cognitive coefcient c1, social coefcient c2, and the inertia parameter w at each iteration by using the formulas (5),

(6) and (7), respectively.

Step 7. New velocities and positions of the particles are calculated by

using the formulas given in Eqs. (8) and (9).

Step 8. Repeat Step 4 to Step 8 until maximum iteration bound (maxt)

is reached.

Step 9. Gbest gives optimal fuzzy relation matrix (Roptimal). The

forecasts and RMSE value for test data are calculated by

using Roptimal and applying Steps 4.2 and 4.4.

4. The application

In the literature, there are many studies about stock exchange forecasting. Wei (2013) and Cheng et al. (2013) proposed new hybrid ANFIS

(adaptive network fuzzy inference system) methods to forecast TAIEX

data. Cheng and Wei (2014) proposed a hybrid method to forecast

TAIEX. In this study, the proposed method's performance is compared

with some methods by using three different sets of the stock index

time series. The application results are given in the subsections.

7500

7000

6500

6000

The rst time series is the data of Index 100 for the stocks and bonds

exchange market of Istanbul (IMKB). Observations of IMKB are obtained

daily between 03/October/2008 and 31/December/2008. A sequence

chart of IMKB is given in Fig. 3. The time series has 59 observations.

Model. (2014), http://dx.doi.org/10.1016/j.econmod.2014.02.017

Table 2

Forecasting results for TAIFEX data set.

Date

Test set

Aladag (2013)

Proposed method

10.09.1998

11.09.1998

.14.09.1998

15.09.1998

16.09.1998

17.09.1998

18.09.1998

19.09.1998

21.09.1998

22.09.1998

23.09.1998

24.09.1998

25.09.1998

28.09.1998

29.09.1998

30.09.1998

6709.75

6726.50

6774.55

6762.00

6952.75

6906.00

6842.00

7039.00

6861.00

6926.00

6852.00

6890.00

6871.00

6840.00

6806.00

6787.00

RMSE

MAPE

MAE

6621.43

6677.48

6709.63

6732.02

6753.38

6756.02

6804.26

6842.04

6839.01

6897.33

6896.83

6919.27

6903.36

6895.95

6879.31

6878.34

93.5

1.09%

74.62

6917.40

6852.23

6805.71

6762.37

6793.06

6784.40

6970.74

6977.22

6874.46

7126.05

6862.49

6944.36

683,188

6843.24

6858.45

6825.64

102.96

1.14%

78.08

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

6850.00

83.58

0.96%

65.62

6745.45

6757.89

6731.76

6722.54

6753.72

6761.54

6857.27

6898.97

6853.07

6951.95

6896.84

6919.94

6884.99

6894.10

6866.17

6865.06

80.02

0.87%

60.19

6750

6750

6850

6850

6850

6850

6850

6850

6950

6850

6850

6850

6850

6850

6850

6750

72.55

0.82%

56.37

6778

6778

6778

6778

6778

6856

6925

6856

6856

6856

6856

6856

6856

6856

6856

6778

74.94

0.75%

52.05

6826

6741

6741

6741

6963

6963

6894

6894

6894

6894

6894

6894

6894

6894

6826

6926

66.08

0.73%

49.78

if Table 2 is examined, it is clear that the proposed method outperforms the other methods according to RMSE, MAPE and MAE criteria.

The rst 52 and the last 7 observations are used as the training and the

test sets, respectively.

In Yolcu et al. (2013), IMKB data set was forecasted by Song and

Chissom (1993b), Chen (1996), and Huarng (2001) distribution and average based methods, and Huarng and Yu (2006), and Cheng et al.

(2008) methods. The forecasts and RMSE, mean absolute percentage

error (MAPE) and mean absolute error (MAE) values of these methods

are given in Table 1. MAPE and MAE values are calculated by using Eqs.

(15)(16).

MAPE

MAE

^t

1 Xn yt y

t1

n

yt

15

1 Xn

^t j:

jy y

t1 t

n

16

The best forecasts are obtained from these methods in the following

situations: In Song and Chissom (1993b), the number of fuzzy sets is 12;

in Chen (1996), length of interval is 1200; in Huarng and Yu (2006)

ratio based method, ratio sample percentile is 0.5; in Cheng et al.

(2008), the number of fuzzy sets is 5; in Yolcu et al. (2013) method,

the number of fuzzy sets is 11 and the number of hidden layer neurons

is 5. In the Huarng (2001) distribution based method, length of interval

is 800; in average based method, length of interval is 200. Moreover, the

fuzzy sets and second order model are used in the proposed method, the

best forecast result can be obtained from IMKB data set. In this situation,

it obtained the optimal R matrix given below.

2

0; 8278

6 0; 2988

6

R6

6 0; 4846

4 0; 0000

0; 5778

0; 7949

0; 8823

0; 7052

0; 4821

0:2249

0; 8168

0; 2765

0; 8618

0; 5991

0; 4929

0; 5580

0; 3085

0; 0877

0; 6784

0; 4238

3

0; 0013

0; 0000 7

7

0; 8560 7

7

0; 5065 5

0; 7642

than the others according to RMSE and MAPE criteria.

4.2. Taiwan future exchange application

Secondly, the proposed method is applied to Taiwan future exchange (TAIFEX) data whose observations are between 03.08.1998

and 30.09.1998. The time series has 47 observations. The rst 31 and

the last 16 observations are used as the training and the test sets, respectively. The graph of TAIFEX is given in Fig. 4.

TAIFEX data is forecasted by the proposed method. TAIFEX data is

also forecasted by using methods proposed by Lee et al. (2007, 2008),

Aladag et al. (2009), Hsu et al. (2010), Aladag (2013) and Aladag et al.

(2012). The forecast results produced by the methods proposed in

Aladag et al. (2009), Hsu et al. (2010), Aladag (2013) and Aladag et al.

(2012) were taken from corresponding papers. When the proposed

7600

7100

TAIEX

6600

6100

5600

5100

Table 3

The results obtained from all methods.

Method

RMSE

Chen (1996)

Chen (2002)

Huarng and Yu (2006)

Huarng et al. (2007)

Yu and Huarng (2008)

Aladag et al. (2009)

Chen and Chen (2011)

Proposed method

77.86

77.18

71.98

63.57

72.35

67.00

69.80

57.30

51.14

Model. (2014), http://dx.doi.org/10.1016/j.econmod.2014.02.017

method is applied to TAIFEX data, the best forecasts are obtained from

second order model and ve fuzzy sets. All forecasted results are given

in Table 2.

4.3. Taiwan Stock Exchange Capitalization Weighted Stock Index Application

Finally, the proposed method is applied to Taiwan Stock Exchange

Capitalization Weighted Stock Index (TAIEX) data between 01.01.2004

and 31.12.2004. The sequence chart of the time series is shown in

Fig. 5. The rst 205 observations are used as training set and the last

45 observations are used as a test set.

The forecast results produced by Song and Chissom (1993b), Chen

(1996, 2002), Huarng and Yu (2006), Huarng et al. (2007), Yu and

Huarng (2008), Aladag et al. (2009) and Chen and Chen (2011)

methods were taken from corresponding papers. When the proposed

method is applied to TAIEX data, the best forecasts are obtained from

the second order model and when seven fuzzy sets are used. All forecast

results are given in Table 3.

Moreover, the MAPE value of the proposed method for TAIEX data is

0.0069. It can be concluded that the proposed method outperforms the

other method for TAIEX data according to RMSE criterion. Also, the

MAPE value of the proposed method is very small. The sequence chart

of forecasts and test data is given in Fig. 6.

5. Conclusion and discussions

Determination of the fuzzy relation stage in the fuzzy time series

methods is very important for forecast performance. Aladag et al.

(2012) proposed a rst order fuzzy time series method. In this

paper, this method is successfully improved for a high order fuzzy

time series forecasting model. According to the application results,

the proposed method has better forecasting performance than

many other methods in the literature. Because the proposed method

is based on the high order fuzzy time series forecasting model, real

life time series can be well forecasted. Moreover, the proposed method takes into consideration all membership vales. It should not be

forgotten that the performance of the proposed method can change

for different data sets. It is not easy to say it will outperform other

methods for every data set. As a result of implementation, it can be

seen that the proposed method can produce good forecasts for the

three stock exchange data sets. Although the proposed method is improved to a high order form, the order selection is an important

problem for it. In future studies, order selection for the proposed

method can be achieved by using optimization techniques. If some

new techniques applied in the fuzzication and defuzzication

stages, a better forecasting performance could be obtained from the

proposed method. In the future, proposed method can be easily

modied for better forecasting performance and multivariate fuzzy

6200

Proposed Method

TAIEX Test Set

6100

6000

5900

5800

5700

5600

1

9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45

Fig. 6. The sequence chart of TAIEX data and forecasts of proposed method.

time series models. Although fuzzy time series methods can produce

good forecasts, the condence intervals for forecasts cannot be obtained. It can be said that this is a very big challenge for nonprobabilistic forecasting methods. Obtaining condence intervals of

forecasts for the proposed method will be considered in future

studies.

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