TY - GEN
T1 - Linear, adaptive and nonlinear trading models for Singapore stock market with random forests
AU - Wang, Qing Guo
AU - Li, Jin
AU - Qin, Qin
AU - Sam Ge, Shuzhi
PY - 2011
Y1 - 2011
N2 - This paper presents various trading models for the stock market and test whether they are able to consistently generate excess returns from the Singapore Exchange (SGX). Instead of conventional ways of modeling stock prices, we construct models which relate the market indicators to a trading decision directly. Furthermore, unlike a reversal trading system or a binary system of buy and sell, we allow three modes of trades, namely, buy, sell or stand by, and the stand-by case is important as it caters to the market conditions where a model does not produce a strong signal of buy or sell. Linear trading models are first developed with the scoring technique which weights higher on successful indicators, as well as with the Least Squares technique which tries to match the past perfect trades with its weights. The linear models are then made adaptive by using the forgetting factor to address market changes. Because stock markets could be highly nonlinear sometimes, the decision trees with the Random Forest method are finally employed and they form nonlinear trading models. All the models are trained and evaluated on ten stocks traded on SGX over extended time periods and statistical tests such as randomness, linear and nonlinear correlations are conducted on the data to check the statistical significance of the inputs and their relation with the output before a model is trained. Our empirical results show that the proposed trading methods are able to generate excess returns compared with the buy-and-hold strategy.
AB - This paper presents various trading models for the stock market and test whether they are able to consistently generate excess returns from the Singapore Exchange (SGX). Instead of conventional ways of modeling stock prices, we construct models which relate the market indicators to a trading decision directly. Furthermore, unlike a reversal trading system or a binary system of buy and sell, we allow three modes of trades, namely, buy, sell or stand by, and the stand-by case is important as it caters to the market conditions where a model does not produce a strong signal of buy or sell. Linear trading models are first developed with the scoring technique which weights higher on successful indicators, as well as with the Least Squares technique which tries to match the past perfect trades with its weights. The linear models are then made adaptive by using the forgetting factor to address market changes. Because stock markets could be highly nonlinear sometimes, the decision trees with the Random Forest method are finally employed and they form nonlinear trading models. All the models are trained and evaluated on ten stocks traded on SGX over extended time periods and statistical tests such as randomness, linear and nonlinear correlations are conducted on the data to check the statistical significance of the inputs and their relation with the output before a model is trained. Our empirical results show that the proposed trading methods are able to generate excess returns compared with the buy-and-hold strategy.
UR - http://www.scopus.com/inward/record.url?scp=84858969800&partnerID=8YFLogxK
U2 - 10.1109/ICCA.2011.6137897
DO - 10.1109/ICCA.2011.6137897
M3 - Conference contribution
AN - SCOPUS:84858969800
SN - 9781457714757
T3 - IEEE International Conference on Control and Automation, ICCA
SP - 726
EP - 731
BT - 2011 9th IEEE International Conference on Control and Automation, ICCA 2011
T2 - 9th IEEE International Conference on Control and Automation, ICCA 2011
Y2 - 19 December 2011 through 21 December 2011
ER -