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Financial forecasting through unsupervised clustering and neural networks

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Abstract

In this paper, we review our work on a time series forecasting methodology based on the combination of unsupervised clustering and artificial neural networks. To address noise and non-stationarity, a common approach is to combine a method for the partitioning of the input space into a number of subspaces with a local approximation scheme for each subspace. Unsupervised clustering algorithms have the desirable property of deciding on the number of partitions required to accurately segment the input space during the clustering process, thus relieving the user from making this ad hoc choice. Artificial neural networks, on the other hand, are powerful computational models that have proved their capabilities on numerous hard real-world problems. The time series that we consider are all daily spot foreign exchange rates of major currencies. The experimental results reported suggest that predictability varies across different regions of the input space, irrespective of clustering algorithm. In all cases, there are regions that are associated with a particularly high forecasting performance. Evaluating the performance of the proposed methodology with respect to its profit generating capability indicates that it compares favorably with that of two other established approaches. Moving from the task of one-step-ahead to multiple-step-ahead prediction, performance deteriorates rapidly.

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Authors and Affiliations

  1. Computational Intelligence Laboratory (CI Lab), Department of Mathematics, University of Patras, Greece

    N. G. Pavlidis, V. P. Plagianakos, D. K. Tasoulis & M. N. Vrahatis

  2. University of Patras Artificial Intelligence Research Center (UPAIRC), GR-26110, Patras, Greece

    N. G. Pavlidis, V. P. Plagianakos, D. K. Tasoulis & M. N. Vrahatis

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  1. N. G. Pavlidis
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  2. V. P. Plagianakos
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  3. D. K. Tasoulis
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  4. M. N. Vrahatis
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Pavlidis, N.G., Plagianakos, V.P., Tasoulis, D.K. et al. Financial forecasting through unsupervised clustering and neural networks. Oper Res Int J 6, 103–127 (2006). https://doi.org/10.1007/BF02941227

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