Financial time series forecasting

using support
vector machines
Author: Kyoung-jae Kim
2003 Elsevier B.V.
Outline
Introduction to SVM
Introduction to datasets
Experimental settings
Analysis of experimental results
Linear separability
Linear separability
In general, two groups are linearly separable in n-
dimensional space if they can be separated by an
(n 1)-dimensional hyperplane.
Support Vector Machines
Maximum-margin hyperplane

maximum-margin hyperplane
Formalization
Training data

Hyperplane

Parallel bounding hyperplanes


Objective
Minimize (in w, b)
||w||
subject to (for any i=1, , n)

A 2-D case
In 2-D:
Training data:
x
i
c
i
<1, 1> 1
<2, 2> 1
<2, 1> -1
<3, 2> -1
-2x+2y+1=-1
-2x+2y+1=1
-2x+2y+1=0
w=<-2, 2>
b=-1
margin=sqrt(2)/2
Not linear separable
No hyperplane can separate the two groups
Soft Margin
Choose a hyperplane that splits the examples
as cleanly as possible
Still maximizing the distance to the nearest
cleanly split examples
Introduce an error cost C
d*C
Higher dimensions
Separation might be easier
Kernel Trick
Build maximal margin hyperplanes in high-
dimenisonal feature space depends on inner
product: more cost
Use a kernel function that lives in low
dimensions, but behaves like an inner product
in high dimensions
Kernels
Polynomial
K(p, q) = (pq + c)
d
Radial basis function
K(p, q) = exp(-||p-q||
2
)
Gaussian radial basis
K(p, q) = exp(-||p-q||
2
/2
2
)


Tuning parameters
Error weight
C
Kernel parameters

2

d
c
0
Underfitting & Overfitting
Underfitting

Overfitting

High generalization ability
Datasets
Input variables
12 technical indicators
Target attribute
Korea composite stock price index (KOSPI)
2928 trading days
80% for training, 20% for holdout
Settings (1/3)
SVM
kernels
polynomial kernel
Gaussian radial basis function

2

error cost C
Settings (2/3)
BP-Network
layers
3
number of hidden nodes
6, 12, 24
learning epochs per training example
50, 100, 200
learning rate
0.1
momentum
0.1
input nodes
12
Settings (3/3)
Case-Based Reasoning
k-NN
k = 1, 2, 3, 4, 5
distance evaluation
Euclidean distance
Experimental results
The results of SVMs with various C where
2
is fixed
at 25
Too small C
underfitting
*
Too large C
overfitting
*
* F.E.H. Tay, L. Cao, Application of support vector machines in -nancial time series forecasting, Omega 29 (2001) 309317
Experimental results
The results of SVMs with various
2
where C is fixed
at 78
Small value of
2
overfitting
*
Large value of
2
underfitting
*
* F.E.H. Tay, L. Cao, Application of support vector machines in -nancial time series forecasting, Omega 29 (2001) 309317
Experimental results and conclusion
SVM outperformes BPN and CBR
SVM minimizes structural risk
SVM provides a promising alternative for
financial time-series forecasting
Issues
parameter tuning