Neurocomputing 83 (2012) 1221

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Neurocomputing
journal homepage: www.elsevier.com/locate/neucom

Fluctuation prediction of stock market index by Legendre neural network

with random time strength function
Fajiang Liu, Jun Wang n
College of Science, Key Laboratory of Communication and Information System, Beijing Jiaotong University, Beijing 100044, China

a r t i c l e i n f o a b s t r a c t

Article history: Stock market forecasting has long been a focus of nancial time series prediction. In this paper, we
Received 23 February 2011 investigate and forecast the price uctuation by an improved Legendre neural network. In the
Received in revised form predictive modeling, we assume that the investors decide their investing positions by analyzing the
20 July 2011
historical data on the stock market, so that the historical data can affect the volatility of the current
Accepted 21 September 2011
stock market, and a random time strength function is introduced in the forecasting model to give a
Communicated by P. Zhang
Available online 5 January 2012 weight for each historical data. The impact strength of the historical data on the market is developed by
a random process, where a tendency function and a random Brownian volatility function are applied to
Keywords: describe the behavior of the time strength, here Brownian motion makes the model have the effect of
Prediction
random movement while maintaining the original uctuation. Further, the empirical research is made
Legendre neural network
in testing the predictive effect of SAI, SBI, DJI and IXIC in the established model, and the corresponding
Stock market index
Random time strength function statistical comparisons of the above market indexes are also exhibited.
Computer simulation & 2011 Elsevier B.V. All rights reserved.

1. Introduction The nancial time series models described by nancial theories

Recently, statistical behaviors and forecasting of price uctuations
for stock markets have been investigated by various articial intelli-
gence methods, for example see [1,2,46,9,11,14,16,19,20,2224].
According to the randomness and the nonlinear nature of stock price
returns, the articial neural network is introduced to train and
forecast the uctuations of the stock market, since articial neural
network, as a computing system containing many simple nonlinear
computing units or nodes interconnected by links, can handle
disorderly comprehensive information without requiring strong
model assumptions, and also has good nonlinear approximation
capability, strong self-learning and self-adaptive abilities. So that
the neural network is a well-tested method for nancial analysis on
the stock market, pattern recognition and optimization, see
[4,7,13,15,21,2527]. Financial forecasting is the process of making
projections about future performance based on existing historical
data. Because of the uncertainties involved in the volatility of stock
market, many factors have the impact on the market uctuations,
which include the estimate for this stock price, positive or negative
news, trends, political event and economic policy, etc. The stock price
time series data is characterized by nonlinearities, discontinuities, and
high-frequency multi-polynomial components.
n
Corresponding author.
E-mail addresses: jun6211wang@yahoo.com.cn,
wangjun@bjtu.edu.cn (J. Wang).
have been the basis for forecasting a series of data in the nancial
market. The development of multi-layer concept allows ANN
(articial neural networks) to be considered as one of prediction
methodologies for the actual nancial market. Various models have
been applied to forecast market time series by using ANN. Gooijer
and Hyndman reviewed the papers for the time series forecasting
from the years 19822005, see [10]. The review summarized the
statistical analysis and the simulative methods for the time series
prediction, which included exponential smoothing, autoregressive
integrated moving average (ARIMA), seasonality, state space and
structural models, nonlinear models, long memory models, autore-
gressive conditional heteroskedasticity and generalized autoregres-
sive conditional heteroskedasticity (ARCH-GARCH), etc. They also
compiled the advantages and the disadvantages of each methodology
and pointed out the potential future research elds. Recently, some
related research work focuses on improving the ANNs prediction
performance and developing new articial neural network architec-
ture. Zhang and Wan [29] developed a new ANN architecture
(statistical fuzzy interval neural network) to predict JPY/USD and
GBP/USD exchange rate time series. Majhi et al. [17] discussed the
efcient prediction of exchange rates by functional link articial
neural network (FLANN), cascaded functional link articial neural
network (CFLANN) and least mean square (LMS) model. The article
exhibited that the CFLANN model performed the best followed by the
FLANN and the LMS models. Hassan et al. [12] used a hybrid model,
which including Hidden Markov Model, ANN and Genetic Algorithm,
to forecast the stock market uctuation. And they displayed the

0925-2312/$ - see front matter & 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.neucom.2011.09.033
 F. Liu, J. Wang / Neurocomputing 83 (2012) 1221
advantage of the hybrid forecasting model. Egrioglu et al. [8]
introduced a new method which is based on feed forward articial
neural network to analyze the multivariate high order fuzzy time
series volatility. Menezes and Nikolaev [18] presented a polynomial
neural network forecasting system, which has three features: poly-
nomial block reformulation, local ridge regression for weight estima-
tion and regularized weight subset selection. Further, the relative
performance of this system to other established forecasting proce-
dures is investigated and illustrated by three empirical studies.
In the real nancial markets, the investing environment and the
uctuation behavior of the markets may change greatly, for
example see Chinese stock markets in 2007. As a result, the impact
of the historical data in the training set should be time-variant,
which can properly reect the different behavior patterns of the
markets at different times. If all the data are used to train the
network equivalently, the network system may not be consistent
with the movement of the real stock market. Especially in the
current Chinese stock markets, stock market trading rules and
management systems are changing rapidly, for example, the daily
price limit (now 10%), shareholding reformation, the direct invest-
ment of Hong Kong stock markets, the reorganization of A share, B
share and H share, the establishment of nancial derivatives such as
futures and options, and the internationalization of Shanghai Stock
Exchange. Therefore, using the historical data is difcult to reect
the current Chinese stock markets development. However, if only
the recent data are selected, a lot of useful information will be lost
which the early data hold. In the nancial model of the present
paper, considering the above mentioned nancial situation, a
promising data mining technique in machine learning is proposed,
this predictive approach is based on Legendre neural network and a
random time strength function (LNNRT), or an improved Legendre
neural network. According to the polynomial approximation theory,
a three-layer multi-input Legendre neural network model with a
random time strength function, which applies the Legendre ortho-
gonal polynomial as the transfer function of hidden layer neural
cell, uses the weight sum as its output. And the nonlinear
identication model on the time series is proposed to predict the
change of stock by introducing the well-known back propagation
algorithm with a random time strength function, training the data
of former sample and adjusting the weights of network. In the
present paper, we consider the time series of Shanghai Stock
Exchange (SSE) A Share Index (SAI) and B Share Index (SBI), the
database is from Shanghai Stock Exchange (www.sse.com.cnand
the data of each trading day in the 10-year period from January 4,
2000 to April 30, 2010 are selected for SAI and SBI respectively.
Further, we test the predictive effect of SAI, SBI, Dow Jones
Industrial Average Index (DJI) and Nasdaq Composite Index (IXIC)
by using LNNRT model, and the corresponding comparisons of price
forecasting for the above indexes are displayed.
This paper presents an improved Legendre neural network model,
that is, a random time strength function is introduced in the
forecasting neural network. The impact strength of the historical
data on the market is developed by a random process, where a
tendency function and a random Brownian volatility function are
applied to describe the behavior of the time strength, and Brownian
motion makes the model have the effect of random movement while
maintaining the original uctuation. We hope that this study can
make some contribution to the ANN research and its application.
2. Methodology
2.1. Legendre neural network with a random time strength function
Articial neural network is one of technologies that have made
great progress in studying the volatility of stock market. The
13
Legendre neural network with the random time strength function
is a parallel distribution processor made up of processing units,
which have a natural propensity for storing experiential knowl-
edge and making that knowledge available for use. Major benets
of LNNRT include nonlinearity and adaptability, since LNNRT is
capable of detecting and extracting nonlinear relationships and
interactions among predictor variables, and LNNRTs inferred
patterns and associated estimates of precision do not depend on
any assumptions relating to a distribution of the variables. In the
present paper, according to the polynomial approximation theory
and the established random time strength function, we develop
an improved three-layer multi-input Legendre neural network
model, which applies the Legendre orthogonal polynomial as the
transfer function of hidden layer neural cell, uses the weight sum
as its output. The nonlinear identication model on the time
series is proposed to predict the change of stock by introducing
the well-known back propagation algorithm with the random
time strength function, training the data of former sample and
adjusting the weights of network, see [4].
In Fig. 1, we describe a three-layer feed forward LNNRT model.
The corresponding structure is p  q  1, where p is the number of
inputs, q is the number of neurons in the hidden layer, and one
output unit. The network includes the input vector X t x1t ,
x2t ,    ,xpt , t 1; 2, . . . ,N and the output yt 1 , and each arrow in
the gure symbolizes a parameter in the network. The network is
divided into the layers. The input layer consists of only the inputs
to the network. Then it follows a hidden layer, which consists of
some number of neurons, or hidden units placed in parallel. Each
neuron performs a weighted summation of the inputs, which then
pass the transfer function Ln x, which is the Legendre polyno-
mials. The input of hidden neuron j is described by
p
X
net j wij xit yj :
i1
The output of hidden neuron is given by
!
p
X
Lj net j Lj wij xit yj :
i1
The network output is formed by another weighted summation of
the outputs of the neurons in the hidden layer. This summation
on the output is called the output layer. In Fig. 1, there is only one
output in the output layer, since it is a single-output problem in
this work. Generally, the number of output neurons equals the
number of outputs of the approximation problem. So the output
of the Legendre neural network with the random time strength
function is given by
!
q
X Xp
yt 1 cj Lj wij xit yj ,
j0 i1
where wij is the weight that connects the node i in the input layer
neurons to the node j in the hidden layer; cj is the weight that
Fig. 1. Three-layer feed forward network with one output.
14 F. Liu, J. Wang / Neurocomputing 83 (2012) 1221
connects the node j in the hidden layer neurons to the node in the
output layer neurons; and yj is the threshold of neuron.
The forecasting model of the present paper uses the Legendre
polynomials which based on the Legendre orthogonal basis
functions [3,26]. The important properties of Legendre polyno-
mials include: (i) they are orthogonal polynomials; (ii) they arise
in numerous problems especially in those involving spheres or
spherical coordinates or exhibiting spherical symmetry; (iii) in
spherical polar coordinates, the angular dependence is always
best handled by spherical harmonics which are dened in terms
of Legendre functions. The Legendre polynomials are denoted by
Ln x, where n is the order and x (1o x o 1) is the argument of
the polynomial. They constitute a set of orthogonal polynomials
as solutions to the differential equation:
 
d dy
1x2 nn1y 0:
dx dx
The zero and the rst order Legendre polynomials are given by
L0 x 1 and L1 x x respectively. The higher order polynomials
are given by follows:
L2 x 12 3x2 1, L3 x 12 5x3 3x, L4 x 1835x4 30x2 3:
The recursive formula to generate higher order Legendre poly-
nomials is expressed as
1
Ln 1 x 2n 1xLn xnLn1 x:
n1
And Rodriguez formula of Legendre polynomial is given by
n
1 d
Ln x x2 1n :
2 n! dxn
n
2.2. Learning with the random time strength function
In order to minimize a given cost function, the learning process
involves the updating of the weights of LNNRT. Gradient descent
algorithm is used for learning, where the gradient of a cost
function with respect to the weights is determined and the
weights are incremented by a fraction of the negative gradient
on each repetition. The well-known back propagation algorithm is
used to update the weights of LNNRT. Considering LNNRT with a
single output node, the objective of the learning algorithm is to
minimize Ek . We assume that the error of the output is
etn dtn ytn , and then the error of the sample n is dened as
Et n 12jt n dtn ytn 2 ,
where dtn is the actual value, ytn is the output value at time t n , t n is
the time of the sample n, jt n is the random time strength
function. Here we assume that the investors decide their invest-
ment positions by analyzing the historical data on the stock
market, the historical data affect the volatility of the current
stock market, and the historical data are given efcient informa-
tion depending on their time. We also introduce the Brownian
motion in order to make the model have the effect of random
movement while maintaining the original uctuation. Now we
dene jt n as following:
R tn R tn
1 mt dt t st dBt
jt n  e t0 0 ,
t learning parameter Z which is between 0 and 1, and the training
where t 4 0 is the time strength coefcient, t 0 is the current
time or the time of the newest data in the data set, and t n is an
arbitrary time point in the data set. mt is the drift function (or
the trend term), st is the volatility function, and B(t) is the
standard Brownian motion [28]. A Brownian motion is a real-
valued, continuous stochastic process fXt,t Z 0g on a probability
space O,A, P, with independent and stationary increments.
In details: (a) continuity: the map s/Xs is continuous P a.s.;
(b) independent increments: If s r t, X t X s is independent of
F sX u ,u r s; (c) stationary increments: If s r t, X t X s and
X ts X 0 have the same probability law. From this denition we
have (see [28]), if fXt,t Z 0g is a Brownian motion, then X t X 0 is
a normal random variable with mean rt and variance s2 t, where r
and s are constant real numbers. A Brownian motion is standard
(we denote it by B(t)) if B0 0 P a.s., EBt 0 and EBt2 t.
And the corresponding probability density function is given by
p 2
f t x 1= 2pt ex =2t . The above random time strength function
implies that the impact of the historical data on the stock market
is a time variable function. Then the corresponding total error of
all the data training sets in the output layer at k-th network
repeated training is dened as
Rt Rt
X
N
1XN
1 t n mt dt t n st dBt
Ek Et n e 0 0 dtn ytn 2 : 2
n1
2n1t
On each repetition, an input pattern is applied, the output of
the LNNRT is computed and the error Et n is obtained. The error
value is used in the back propagation algorithm to minimize the
cost function until it reaches a pre-dened minimum value. The
goal of the learning algorithm is to minimize the cost function Ek .
The gradient of the cost function is given by DEk @Ek =@W. For the
weight nodes in the input layer, the gradient of the connective
weight wij is given by
@Ek
Dwij Z Zetn cj jt n L0j net j xitn
@wij
and for the weight nodes in the hidden layer, the gradient of the
connective weight cj is given by
@Ek
Dcj Z Zetn jt n Lj net j ,
@cj
where Z is the learning parameter which is set between 0 and 1,
L0j net j is the derivative of the activation function for Legendre
neural network with the random time strength function. So the
update rule for the weight wij and cj is given by
wij k 1 wij k Dwij k wij k Zetn cj jt n L0j net j xitn ,
cj k 1 cj k Dcj k cj k Zetn jt n Lj net j :
2.3. The training algorithms procedure in LNNRT model
Note that the training objective of LNNRT is to modify the
network weights so as to minimize the error between the net-
works prediction and the actual target. In Fig. 2, the training
algorithms procedures of the improved Legendre neural network
are shown, which are as follows:
Step 1: Train the Legendre neural network with the random
time strength function by choosing ve kinds of stock prices as
the input values in the input layer: daily opening price, daily
closing price, daily highest price, daily lowest price and daily
trade volume, and one price of the stock prices in the output
layer: the closing price of the next trading day. Then choose
p  q  1 three layer network model structure, set the network
1
times k.
Step 2: Set the connective weights, and input the training data
sets. At the beginning of data processing, set connective weights
wij 0 and cj 0 follow the uniform distribution on 1; 1, and let
the neural threshold yj be 0.
Step 3: Introduce the random time strength function jt n in
the error function Ek . Choose the drift function mt and the
 F. Liu, J. Wang / Neurocomputing 83 (2012) 1221
Fig. 2. The procedure of the improved Legendre neural network model.
volatility function st; give the transfer function from the input
layer to the hidden layer.
Step 4: Establish an error acceptable model and pre-set
minimum training error x. Based on network training objective
P
Ek N n 1 Et n , if Ek is below pre-set minimum error, go to Step
6, otherwise go to Step 5.
Step 5: Modify the network connective weights: calculate
the gradient of the connective weights wij , Dwij k. Calculate the
gradient of the connective weights cj , Dcj k. Then modify the
weights from the layer to the previous layer, wij k 1 or cj k 1.
Step 6: In training the network, its parameters are adjusted
incrementally until the training data satisfy the desired mapping
as well as possible; that is, until yt 1 matches the desired value
dt 1 as closely as possible up to a maximum number of iterations,
P P
then output the predictive value yt 1 qj 0 cj Lj pi 1
wij xit yj .
15
3. Experiment analysis
3.1. Selection and preprocessing of the data
In this paper, four stock indexes time series have been used for
experiments. We select the data of each trading day in a 10-year
period (from January 4, 2000 to April 30, 2010) for Shanghai Stock
Exchange (SSE) A Share Index and B Share Index. This period
amounts to 2495 trading days, and we also choose the corre-
sponding data of DJI and IXIC by comparison. Recently, some
research work has been made to apply neural network to forecast
time series of nancial market, for example see Azoff [4]. In the
previous work, neural network is usually applied to predict the
closing stock price of the next trading day according to the history
data. The stock data of the past trading days, including daily
opening price, daily closing price, daily highest price, daily lowest
16 F. Liu, J. Wang / Neurocomputing 83 (2012) 1221

price and daily trade volume, are very important indicators and as follows:
contain lager amount of information. So in the present paper, we
stmin st
apply the history indicators as the input of neural network, the st0 :
max stmin st
closing price of the next trading day as the output to predict stock
price. Next we study the statistical properties of the returns for Similar to the above, the normalized values of the above-men-
the stock indexes. Fig. 3 presents the plot of the time series log tioned ve kinds of data can also be given.
return of SAI, SBI, DJI and IXIC. We denote the price sequences of
SAI, SBI, DJI and IXIC at time t by stt 0; 1,2, . . ., then the
corresponding formula of stock logarithmic return is given by 3.2. Training the improved Legendre neural network

Rt ln st 1ln st: Data sets are divided into two parts, the data training set and
the data testing set. We collect the data of SAI in 2000.12009.3
In Fig. 3, we can see that the prices of the index uctuate as the training set and the data of SAI in 2009.42010.4 as the
wildly, and this shows that there is a very high level of noise in testing set. According to the procedures of the three-layer net-
the data that causes the difculty in forecasting. In the pretreat- work introduced in Section 2, we chose the 5  15  1 neural
ment stage, the collected data should be properly adjusted and network structure which ve is the number of neural nodes in the
normalized, in order to reduce the impact of noise in the stock input layer, 15 is the number of neural nodes in the hidden layer
markets. First, three-sigma rule of mathematical statistics is and one is the number of neural nodes in the output layer. The
applied for data preprocessing before forecasting, that is, the maximum training cycles and the learning rate are set 120 and
sample data lie without 3 standard deviations of the mean should Z 0:01 respectively, and the pre-set minimum error accuracy is
be deleted. Second, the input data are pre-processed (or normal- set 0.001. When using the Legendre neural network with
ized) between 0 and 1, and passed to the improved Legendre the random time strength function to predict the daily closing
neural networks as non-stationary data. The data are normalized price of stock index, we assume mt (the drift function) and st

0.1 0.1

0.08
loganthmic prise returns R(t) of SAI

loganthmic prise returns R(t) of SBI

0.06 0.05

0.04

0.02 0

0.02 0.05

0.04

0.06 0.1

0.08 loganthmic prise returns R(t) of SAI loganthmic prise returns R(t) of SBI

0.1 0.15
0 500 1000 1500 2000 2500 0 500 1000 1500 2000 2500
TimeT TimeT

0.15
0.1

0.08 loganthmic prise returns R(t) of DJI 0.1

loganthmic prise returns R(t) of IXIC
loganthmic prise returns R(t) of DJI

0.06
0.05
0.04

0.02 0

0
0.05
0.02

0.04 0.1

0.06
0.15 loganthmic prise returns R(t) of IXIC
0.08

0.1 0.2
0 500 1000 1500 2000 2500 3000 0 500 1000 1500 2000 2500 3000
Time T Time T

Fig. 3. The plots of log price returns of SAI (a), SBI (b), DJI (c) and IXIC (d).
 F. Liu, J. Wang / Neurocomputing 83 (2012) 1221 17

Table 1 (the volatility function) as follows:

Comparison of training errors of different data for SAI, SBI, DJI and IXIC with the v
model LNNRT. u
1 u 1 X N
mt , st t xt x2 , 3
2 N1 t 1
Time Actual Predictive Error t a

(a) SAI where a is the predictive parameter, x is the mean of the sample
2000/1/14 1497.260 1574.2643 0.0514
data. The random time strength function is given by (see (1))
2002/1/16 1539.820 1580.3856 0.0263
2007/1/16 2963.864 2883.8650 0.0270 r
R tn R tn PN
2008/1/16 5552.460 5577.5392 0.0045 1=t a2 dt 1=N1 xt x2 dBt
1 t0 t0
2009/1/15 2015.950 2016.4100 0.0002 jtn e t 1
:
t
(b) SBI
2000/1/19 38.500 44.3055 0.1508 The cost function of network training is given by (see (2))
2002/1/21 142.020 148.5087 0.0457 r
2006/1/20 85.462 84.0018 0.0171 R tn 2
R tn P N
2
2008/1/18 354.496 351.3777 0.0088 1XN
1 t0 1=t a dt t0 1=N1 t 1xt x dBt
2009/1/19 121.067 121.3296
Ek e dtn ytn 2 :
0.0022 2n1t
(c) DJI
2001/11/13 9750.950 9521.8256 0.0235 In the following, we consider the LNNRT model by comparison
2002/11/14 8542.130 8374.8577 0.0196 for different pair values of m, s, which are selected as mt, st,
2006/11/14 12 218.010 12 062.7718 0.0127
2007/11/14 13 231.010 13 078.2572 0.0115
mt,0, 0, st and (0,0) respectively. In Table 1, the training
2008/11/14 8497.310 8444.4129 0.0062 errors of different trading dates for (a) SAI, (b) SBI, (c) DJI, and
(d) IXIC with the LNNRT model mt, st are given. Take the
(d) IXIC
2001/9/25 1501.640 1555.9305 0.0362 relative error of SAI for example, it can be seen that during
2003/9/24 1843.700 1883.8808 0.0218 the years 2000 and 2007, the relative error is larger than those in
2005/9/23 2116.840 2082.6815 0.0161 the year 2008 and 2009, and the errors become smaller as the
2007/9/24 2667.950 2644.8227 0.0087
2008/9/24 2155.680 2154.9914 0.0003
time goes on, this shows the effect of the random time strength
function. Furthermore, the gap between the relative error of SAI

0.15 0.15

Relative errors of SAI Relative errors of SBI

0.1 0.1

0.05
0.05
Relative errors of SAI

Relative errors of SBI

0
0
0.05
0.05
0.1

0.1
0.15

0.15
0.2

0.2 0.25
0 500 1000 1500 2000 2500 0 500 1000 1500 2000 2500
Time T Time T

0.15 0.15
Relative errors of IXIC
Relative errors of DJI
0.1
0.1

0.05
Relative errors of IXIC
Relative errors of DJI

0.05
0

0.05
0

0.1
0.05
0.15

0.1 0.2
0 500 1000 1500 2000 2500 3000 0 500 1000 1500 2000 2500 3000
Time T Time T

Fig. 4. Relative errors of SAI (a), SBI (b), DJI (c) and IXIC (d) with the parameter mt, st.
18 F. Liu, J. Wang / Neurocomputing 83 (2012) 1221

Table 2 and SBI is much larger than the relative error of DJI and IXIC.
Average relative errors of SAI, SBI, DJI and IXIC with different values mt, st. So we can conclude that the value of the historical data in the
foreign stock markets is greater than those in the Chinese stock
lt, rt SAI SBI DJI IXIC
markets, this means that the Chinese stock markets uctuate
(a) mt, st more sharply, the foreign stock markets are more stable.
I 0.0221 0.0122 0.0064 0.0142 Fig. 4 shows the uctuation behaviors of the time sequences of
II 0.0034 0.0016 0.0043 0.0046 relative errors during the years 20002009 for the prices of SAI, SBI,
III 0.0158 0.0064 0.0058 0.0121
IV 0.0328 0.0183 0.0127 0.0225
DJI and IXIC. In these plots, the time zero represents the farthest data
to the current date, and the larger t (date) represents the date that is
(b) 0, st
nearer to the current date. Fig. 4 also indicates that the improved
I 0.0350 0.0274 0.0104 0.0213
II 0.0203 0.0239 0.0273 0.0162 Legendre neural network model can be realized by assigning
III 0.0228 0.0258 0.0174 0.0129 different weights to the data of different time. Time sequences of
IV 0.0219 0.0299 0.0108 0.0325 relative errors of (a) SAI and (d) IXIC in Fig. 4 also reect the
(c) mt,0 randomness of model by the effect of the Brownian motion.
I 0.0332 0.0257 0.0107 0.0220 In Table 2, the symbol I stands for the training average
II 0.0204 0.0240 0.0276 0.0167 relative error, II stands for the latest 100 days in the training
III 0.0214 0.0247 0.0187 0.0138
data sets, III stands for the latest 500 days in the training data
IV 0.0218 0.0284 0.0108 0.0326
sets, and IV stands for the average relative error of the rst 1000
(d) (0,0)
days in the training data sets. Take the relative error of SAI with
I 0.0367 0.0276 0.0107 0.0227
II 0.0203 0.0239 0.0277 0.0167
mt, st for example, the average relative error is 2.21%, the
III 0.0244 0.0262 0.0187 0.0138 average relative error of the rst 1000 days is 3.28%, the average
IV 0.0230 0.0301 0.0108 0.0346 relative error of the latest 100 days is 0.34%, and the average
relative error of the latest 500 days is 1.58%. So from the above

3800 280
Actual value
3600 260 Actual value
Predictive value
Predictive value
3400 240
Stock Price Index of SBI

3200 220
SAI

3000 200

2800 180

2600 160

2400 140

2200 120
2200 2250 2300 2350 2400 2450 2500 2200 2250 2300 2350 2400 2450 2500
Time T Time T

11500 2600

11000 Actual value

2400 Actual value
10500 Prdictive value
Predictive value
2200
Stock Price Index of IXIC
Stock Price Index of DJI

10000

9500
2000
9000
1800
8500

8000 1600

7500
1400
7000

6500 1200
2300 2350 2400 2450 2500 2550 2600 2200 2250 2300 2350 2400 2450 2500 2550 2600
Time T Time T

Fig. 5. Comparisons of the predictive values and the actual values.

 F. Liu, J. Wang / Neurocomputing 83 (2012) 1221 19

computations, it exhibits that the latest data are more valuable Table 4
than the historical data of the past in the stock market prediction. LNNRT evaluation vs. different Legendre neural networks based on MAPE values.
In Table 2, the test of the four market indexes errors for different
Method SAI SBI DJI IXIC
values mt, st are also given. When the pair value is mt, st,
the errors are the smallest values respectively; for the pair value LNNRT mt, st 1.2721 1.5441 1.6852 2.2754
(0,0), the errors are the largest values respectively. Take the LNNR 0, st 1.3828 1.6462 1.8431 2.3777
relative errors of SAI with mt, st for example, the average LNNT mt,0 1.4661 1.5051 1.8688 2.4068
LNN (0,0) 1.6007 1.7146 1.8885 2.4968
relative error is 2.21% by (3); for the pair value 0, st, the
average relative error is 3.35%; for the pair value mt,0,
the average relative error is 3.32%; and for the pair value (0,0),
the average relative error is 3.67%. This shows that the drift the relative errors of SAI for a week are given by the different
function and the volatility function mt, st which are dened in values mt and st. It shows that the relative error is the smallest
(3) can reduce the predictive errors of market indexes, so the when the pair value is mt, st (almost below 1%), and the
timely effectiveness and the randomness of the random time relative error is the largest for the pair value (0,0) (from 1% to 2%).
strength function jt n are benecial for the prediction of the So this shows that the random time strength function of the
improved Legendre neural network. nancial predictive model is propitious for increasing the preci-
sion of prediction.
3.3. Predictive results
3.4. Performance analysis of LNNRT
In this part, according to the introduced improved Legendre
neural network, the comparisons between the predictive values For the purpose of evaluating LNNRT forecasting accuracy, we
and the actual values of SAI, SBI, DJI and IXIC are displayed for the will compare outputs of this method with different values of mt
pair value mt, st in Fig. 5. and st for indexes SAI, SBI, DJI and IXIC. We perform this task by
In order to test the effect of the random time strength function, a common evaluation statistic which is called Mean Absolute
we take the pair of the drift parameter and the volatility para- Percentage Error (MAPE):
meter to be mt, st, mt,0, 0, st and (0,0) (see (3)). If
st 0, the random time strength function is 1 X M
9di Y i 9
MAPE 100  ,
(Z ) M i 1 di
tn
1 1
jtn exp dt ,
where di is the actual value, Y i is the forecasted value of ith test
t t 0 t a
2

data obtained from LNNRT and M is the number of test data. The
then the model has no effect of the randomness but only has the comparisons of LNNRT evaluation with different Legendre neural
effect of the timely effectiveness. If mt 0, the random time networks are shown in Table 4.
strength function of the model becomes Regarding to Table 4, our proposed approach has improved the
8 v 9
<Z tn u = forecasting accuracy of market indexes prices for all four cases.
1 u 1 X N
jtn exp t 2
xt x dBt , Namely, LNNRT model outperforms the LNN by the MAPE
t : t0 N1 t 1 ; evaluation, so this shows that LNNRT can be considered as a
promising alternative for stock price prediction problems.
then the model has no effect of timely effectiveness but only has
Next, by using the linear regression analysis, we compare the
the effect of the randomness. In Table 3, the predictive values and
predictive values of the improved Legendre neural network model
with the actual values of SAI, SBI, DJI and IXIC in Fig. 6. It is known
Table 3
that the linear regression can be used to t a predictive model to
Predictive values and errors of SAI for different values mt, st.
an observed data set of Y and X values. Through the regression
Time Actual Predictive Error analysis, the linear equations in SAI (a), SBI (b), DJI (c) and IXIC
(d) are obtained. The linear equation for SAI (a) is
(a) mt, st
2010/4/12 3280.900 3276.9066 0.0012 Y predictivevalue 0:9540X 121:6026
2010/4/13 3314.608 3273.6627 0.0124
2010/4/14 3319.775 3297.5000 0.0067 and the correlation coefcient R 0.9984. The linear equation for
2010/4/15 3318.486 3300.6055 0.0054 SBI (b) is
2010/4/16 3282.011 3302.1388  0.0061
Y predictivevalue 0:9662X 4:7104
(b) 0, st
2010/4/12 3280.900 3272.9811 0.0024 and the correlation coefcient R 0.9985. The linear equation for
2010/4/13 3314.608 3270.3739 0.0133 DJI (c) is
2010/4/14 3319.775 3294.5387 0.0076
2010/4/15 3318.486 3296.5602 0.0066 Y predictivevalue 0:9671X 317:0764
2010/4/16 3282.011 3298.1478  0.0049
and the correlation coefcient R 0.9946. The linear equation for
(c) mt,0
IXIC (d) is
2010/4/12 3280.900 3268.7991 0.0037
2010/4/13 3314.608 3267.0836 0.0143 Y predictivevalue 0:9410X 123:7288
2010/4/14 3319.775 3291.4691 0.0085
2010/4/15 3318.486 3292.3202 0.0079 and the correlation coefcient R0.9957.
2010/4/16 3282.011 3293.8971  0.0036

(d) 0; 0
2010/4/12 3280.900 3256.0333 0.0076 4. Conclusion and future research
2010/4/13 3314.608 3255.9392 0.0177
2010/4/14 3319.775 3280.9166 0.0117 In the present paper, according to the polynomial approxima-
2010/4/15 3318.486 3279.2383 0.0118
2010/4/16 3282.011 3280.8920 0.0003
tion theory, we model a three-layer multi-input Legendre neural
network with a random time strength function (LNNRT), which
20 F. Liu, J. Wang / Neurocomputing 83 (2012) 1221

Predictive value vs. Actual value, R=0.9984 Predictive value vs. Actual value, R=0.9985
7000 400

Predictive value points

350 Predictive value points
Best Linear Fit
6000 Best Linear Fit

Predictive value Y, Best Linear Fit:

Predictive valueY, Best Linear Fit:

300
Y=(0.9540)X+(121.6026)

Y=(0.9662)X+(4.7104)
5000
250

4000 200

150
3000

100
2000
50

1000 0
1000 2000 3000 4000 5000 6000 7000 0 50 100 150 200 250 300 350 400
Actual value of SAI Actual value of SBI

x 104 Predictive value vs. Actual value, R=0.9946 Predictive value vs. Actual value, R=0.9957
1.5 5000
Predictive value points
Predictive value points
1.4
Best Linear Fit 4500 Best Linear Fit
Predictive value Y, Best Linear Fit:

Predictive value Y, Best Linear Fit:

1.3
4000
Y=(0.9410)X+(123.7288)
Y=(0.9671)X+(317.0764)

1.2
3500
1.1
3000
1
2500
0.9

2000
0.8

0.7 1500

0.6 1000
0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500
Actual value of DJI x 104 Actual value of IXIC

Fig. 6. Regression of the predictive values and the actual values.

has the timely effectiveness of mt and the randomness of B(t), Acknowledgments

and is introduced in the algorithm of Legendre neural network to
modify the networks weights. In this model, we think that the The authors were supported in part by National Natural
data in the data training set should be time-variant, reecting the Science Foundation of China Grant No. 70771006 and No.
different behavior patterns of stock market at different times. If 10971010, BJTU Foundation No. S11M00010.
all the data are used to train the network equivalently, the
network system may not be consistent with the behavior of stock
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Fajiang Liu is a Researcher in Institute of Financial
Mathematics and Financial Engineering at Beijing
Jiaotong University, China. He received his B.Sc. degree
in Mathematics at Beijing Jiaotong University in 2010.
He is currently working in Department of Mathematics
at Beijing Jiaotong University as a graduate student.
His research interests include Stochastic Systems,
Stochastic Processes, Articial Intelligence, Neural Net-
works, Modeling and Computer Simulation, Probability
Theory and Statistics, Financial Mathematics, Financial
Engineering.
Jun Wang is a Full Professor in College of Science, and
Director of Institute of Financial Mathematics and
Financial Engineering at Beijing Jiaotong University,
China. He received his B.Sc. degree in Mathematics at
Beijing Normal University in 1984, and received his
Ph.D. degree in Probability and Statistics at Kobe
University of Japan in 2000. His research interests
include Large Scale Interacting Systems, Stochastic
Systems, Stochastic Processes, Articial Intelligence,
Neural Networks, Modeling and Computer Simulation,
Probability Theory and Statistics, Financial Mathe-
matics, Financial Engineering.