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Original Title: Pattern Prediction in Stock Market

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Indian Institute of Technology, Delhi

Hauz Khas, New Delhi – 110019, India

saroj@cse.iitd.ernet.in, singhal.naman@gmail.com

the financial time series in stock market for next 10 days and compared it with

the existing method of exact value prediction [2, 3, and 4]. The proposed

pattern prediction technique performs better than value prediction. It has been

shown that the average for pattern prediction is 58.7% while that for value

prediction is 51.3%. Similarly, maximum for pattern and value prediction are

100% and 88.9% respectively. It is of more practical significance if one can

predict an approximate pattern that can be expected in the financial time series

in the near future rather than the exact value. This way one can know the

periods when the stock will be at a high or at a low and use the information to

buy or sell accordingly. We have used Support Vector Machine based

prediction system as a basis for predicting pattern. MATLAB has been used for

implementation.

Finance.

1 Introduction

Mining stock market tendency is regarded as a challenging task due to its high

volatility and noisy environment. Prediction of accurate stock prices is a problem of

huge practical importance. There are two components to prediction. Firstly, historic

data of the firm in consideration needs to be preprocessed using various techniques to

create a feature set. This feature set is then used to train and test the performance of

the prediction system.

During literature survey we found that in the past, work has been done on the

markets around the globe using various preprocessing techniques such as those based

on financial indicators, genetic algorithms, principal component analysis and

variations of time series models. The better prediction systems are based on Artificial

Intelligence techniques such as Artificial Neural Networks [3] and Support Vector

Machines (SVM) [2]. More recent work has even tried to come up with hybrid

systems [6]. Overall, techniques based on Support Vector Machines and Artificial

Neural Networks have performed better than other statistical methods for prediction

[1, 2].

© Springer-Verlag Berlin Heidelberg 2009

82 S. Kaushik and N. Singhal

In all the literature, the emphasis is prediction of the exact value of the stock on the

next day using the data of previous N days. We have extended the concept to predict

pattern for next M days using the data of previous N days. If we try to predict the

actual values of the next M days using the previous N days, the performance is not

good. So, we propose a new concept of pattern prediction. The motivation of such an

approach is to know the periods of relative highs and lows to be expected rather than

knowing the exact values. Here, M and N are the number of days. We analyzed the

three cases i.e. when M>N, M=N and M<N. Best results were obtained for M=N.

The data set being considered for the study is based on the real time financial time

series of the Reliance Industries of the National Stock Exchange, India. We obtain

historic data of the Reliance Industries for the last 8 years from the NSE [9] which

contains day-wise closing, high and low prices. Prediction System uses Least Square

Support Vector Regression (LS-SVR) based on Support Vector Machines [10]. In the

next section we discuss the concepts of LS-SVR followed by implementation, results

and observations.

2 Prediction Methods

In attempt to predict the stock markets behavior, study has been done on many

prediction methods such as Support Vector Machines and Artificial Neural Networks

etc [1,2,7,8]. In our research, we have used SVM based technique and have come up

with unique approach to train SVM for prediction. The SVM used in the proposed

work is the Least Square Support Vector Regression which is an extension of the

Support vector classification proposed by V. Vapnik [1].

The basic idea of SVM is to use linear model to implement nonlinear class boundaries

through some nonlinear mapping of input vector into the high dimensional feature

space. A linear model constructed in the new space can represent a nonlinear decision

boundary in the original space. In the new space, an optimal separating hyper-plane is

constructed. Thus SVM is known as the algorithm that finds a special kind of linear

model, the maximum margin hyper-plane. The maximum margin hyper-plane gives

the maximum separation between the decision classes. The training examples that are

closest to the maximum margin hyper-plane are called support vectors. All other

training examples are irrelevant for defining the binary class boundaries.

Implementation of SVM is done using Support Vector Regression to predict the

output values. Given a set of data points, {( x1, z1 ),..,( xl , zl )} , such that xi ∈ R n is an

input and zi ∈ R1 is a target output, the standard form of a support vector regression

[10] is given below.

l l

1 T

min * w w + C ∑ ε i + C ∑ ε i* . (1)

w, b ,ε ,ε 2 i =1 i =1

Pattern Prediction in Stock Market 83

subject to,

wT ϕ ( xi ) + b − zi ≤∈ +ε i .

zi − wT ϕ ( xi ) − b ≤∈ +ε i* .

ε i , ε i* ≥ 0, i = 1,.., l .

The dual of (1) is

l l

1

min* (α − α * )T Q (α − α * )+ ∈ ∑ (α i + α i* ) + ∑ zi (α i − α i* ) . (2)

α ,α 2

i =1 i =1

subject to,

l

∑ (α

i =1

i − α i* ) = 0,0 ≤α i , α i* ≤ C , i = 1,.., l .

where,

Qij = K ( xi , x j ) .

l

y = ∑ ( −α i + α i* ) K ( xi , x ) + b . (3)

i =1

Here w is the weight vector, ∈, ε , etc are the standard variables used in optimizations,

K is the kernel matrix, ϕ is the kernel function and α i* , α i are the SVM coefficients.

From now on let us denote SVM coefficients by α i = (−α i +α i* ) with no restriction on

α i being greater that zero.

In this section, we will discuss the feature set modeling for pattern prediction and

value prediction [2] and subsequently, the performance of both the methods will be

compared.

The basic concept of value prediction is to use previous N days to predict the value of

next day [5, 6, 7]. We extend this concept to use values of previous N days to predict

the values of next M days. We have analyzed the cases where N > M, N = M and N <

M and found that the result comes out to be best if N = M. A total of M SVMs are

required to implement the proposed prediction technique.

84 S. Kaushik and N. Singhal

th

Let us consider closing price, say, xi of i day. Since one SVM is used to predict

one day, we have used M SVMs to predict next M days prices { xi +1 , xi + 2, ..., xi + M }

from previous N days prices { xi − N +1 , xi − N + 2, ..., xi }.

In the proposed technique for pattern prediction, first we learn all the patterns in the

time series then learn to predict a pattern for next M days using closing price of

previous N days from training data set and finally predict a pattern on test data.

Learn a Pattern in the Time Series. The pattern is represented as a vector of the

coefficients generated by SVM as represented in equation (5). Since we want to

predict the pattern for the next M days, first we learn all patterns of size M using same

size sliding window in the entire time series. To learn one pattern, we create a training

sample consisting of (Day, Price) pair in the current window. Each Day in the current

window is represented by index from 1 to M and Price is represented by xi , the

closing price of i th day (in reference to the complete time series). So to learn a

pattern, there are M training pairs required as follows:

((1, xi +1 ), (2, xi + 2 ),..., ( M , xi + M )), i ∈ TrainingSet . (4)

We train one SVM corresponding to each pattern in the training set of time series.

Once each SVM is trained, we obtain SVM coefficients corresponding to each

pattern. Let us represent the coefficients of i th SVM, say, SVM i by

(α i , α i +1 ,..., α i + M ) and the i th pattern in the time series by coefficients of SVM i as

given below.

α i = {α i +1 , αi + 2 ,..., α i + M } . (5)

Learn to Predict a Pattern. After we have learnt all the patterns in training set, we

will learn to predict the pattern of next M days { α i +1 , α i + 2, ..., α i + M } using the closing

price of previous N days { xi − N +1 , xi − N + 2, ..., xi } from the training data set. For this, a

total of M new SVMs are required. These SVMs have nothing to do with the SVMs

that were used to learn the patterns above.

Prediction of a Pattern. For the test set, we compute the coefficients for j th test

sample and is represented as follows:

β j = {β j +1 , β j + 2 ,..., β j + M } . (6)

To obtain the pattern for j th test sample, we compute the least squared error between

β j and α i ’s, ∀ i∈ TrainingSet and j ∈ TestSet. We consider the predicted pattern of

Pattern Prediction in Stock Market 85

j th day as the learned pattern of i th day for which least squared error between α i

and β j is minimum that is computed as follows.

M

errormin = ∑ (α

k =1

i+k − β j + k )2 . (7)

The financial time series considered is of the Reliance Industries Ltd is its row data is

obtained from NSE website [9].

4.1 Implementation

Data consists of closing price, the highest price and the lowest price of the trading day

for last 8 years. The latest 1500 values are selected and used for experiment, where

1300 values are used for training and the rest 200 values are used for testing

prediction accuracy. We have taken closing price as the feature set for SVM as in

general, the prediction is created using the closing price only.

It is assumed the initial training set is large enough sample to represent a complete

set of patterns and the process of learning pattern is not repeated when we perform

prediction for the same time series.

LS-SVM package [10] is used for implementing Support Vector Machine. For

each learning and prediction, first the parameters of the SVM are optimized and then

parameters of the features are optimized to obtain the best possible prediction

accuracy. During the optimization of the parameters of the feature set, the best

results were obtained when N=M and N=10 [8]. Implementation is done using

MATLAB.

As already mentioned earlier, the best results for predicting next M days value from

previous N days value is obtained when N = M [8], the simulations were done for N =

7,10,14,21. Out of this the best values were obtained for N = 10.

Value Prediction. The graphs are plotted for the actual closing price and the

predicted closing price for all the days that form the test set values for the next day

and 10th day using value prediction method as discussed in Section 3.1. Values on the

Y-axis are the actual closing price of stock in consideration in INR (Indian National

Rupee) X-axis goes from 0 to 200 representing each day of the test set. Plot in blue is

the predicted price while plot in green is the actual closing price.

86 S. Kaushik and N. Singhal

Fig. 2. Actual and predicted closing price for next 10th day

It can be seen that value prediction is good for predicting the next day price. Its

performance deteriorates as we predict for more days in the future as shown in Figs 1

and 2.

Pattern Prediction. Now we show the graphs obtained using the proposed technique

of pattern prediction. They have been directly compared to the corresponding value

prediction plots. Pattern prediction graphs are plotted using the values corresponding

to the pattern predicted and the actual values. Learning data and test data is same as

above.

Pattern Prediction in Stock Market 87

We know that α i where i=1,2,…,1300 is learned pattern at the close of i th day and

β j where j=1,2,…,200, the predicted coefficients at the close of j th day. Consider

such i and j for which error between α i and β j is minimum. The pattern to be

expected for the next M days at j th day will be similar to the pattern at i th day (refer

subsection 3.2). The graph is plotted between {xi +1 , xi + 2 ,..., xi + M } and

{x j +1 , x j + 2 ,..., x j + M } where i∈ TrainingSet and j ∈ TestSet. Graph for the value

prediction is the plotted between value predicted by the SVM and the actual value.

The pattern prediction and value prediction graphs shown in the following figures

have been compared. Pattern prediction graphs are on the left while value prediction

graphs are on the right. Prediction is done for the next M (=10) days following the

close of each day of the test set. Out of the total test set of 200 values only a few

graphs are shown. Plot in blue is the predicted value while plot in green is the actual

closing price.

We can conclude from these graphs that pattern prediction is able to predict the

highs and lows that can be expected in the near future more accurately as compared to

the approach of prediction based on actual values. In the next section, we compare the

results quantitatively.

88 S. Kaushik and N. Singhal

Prediction accuracy is computed in percentage. For each test sample j, we predict for

next M days, where j = 1,..,200. Let us denote the predicted value by p(k), and

corresponding actual values by a(k), where k = 1,…,M. The following formula is used

to compute the prediction accuracy in %age.

Value prediction 51.3% 0% 88.9%

Pattern prediction 58.7% 11.1% 100%

Pattern Prediction in Stock Market 89

∑

100

acc = * sgn[( p(k ) − p(k − 1)) *(a (k ) − a (k − 1))] . (8)

M − 1 k =2

where,

1, x > 0

sgn( x) = .

0, x <= 0

The table1 shows the performance of both the methods quantitatively using above

formula. Here we have shown the minimum, maximum and the average prediction

accuracy obtained over the complete test set. We can clearly see that the pattern

prediction performs better than value prediction. The average for pattern prediction is

58.7% while that for value prediction is 51.3%. Similarly, maximum for the pattern

and value prediction is 100% and 88.9% respectively whereas the minimum is 11.1%

and 0% respectively.

5 Conclusion

Value prediction is a good technique for predicting next day price. However, if we

want to predict the price for next 10-15 days, we do not get good results by predicting

actual value. To tackle such a scenario, we have proposed technique of pattern

prediction. Although, it does not attempt to predict the exact value but it predicts the

expected trend of the prices for the next 10 days. Pattern-prediction gives better

results in prediction of patterns for longer duration.

In the proposed work, we learnt all the patterns present in the time series. Due to

this the SVM coefficients corresponding to the patterns obtained while learning are

very noisy. As a future study, performance of the pattern prediction can be improved

by processing of patterns and using a finite set of patterns rather than all the possible

patterns found in the financial time series. To come up with further improved

performance of the predicted pattern, we can apply some statistical algorithm between

the SVM coefficients and learned pattern coefficients as well.

References

1. Vapnik, V.: The Nature of Statistical Learning Theory. Springer, Heidelberg (1995)

2. Kim, K.: Financial Time Series Forecasting using Support Vector Machines. Neurocomputing

55, 307–319 (2003)

3. Kim, K., Lee, W.B.: Stock Market Prediction using Artificial Neural Networks with

Optimal Feature Transformation. Neural Computing and Application 13, 255–260 (2004)

4. Ince, H., Trafalis, T.B.: Kernel Principal Component Analysis and Support Vector

Machines for Stock Price Prediction. In: Proceedings of IEEE International Joint

Conference on Neural Networks, vol. 3, pp. 2053–2058 (2004)

5. Yu, L., Wang, S., Lai, K.K.: Mining Stock Market Tendency Using GA-based Support

Vector Machines. In: Deng, X., Ye, Y. (eds.) WINE 2005. LNCS, vol. 3828, pp. 336–345.

Springer, Heidelberg (2005)

90 S. Kaushik and N. Singhal

6. Li, W., Liu, J., Le, J.: Using GARCH-GRNN Model to Forecast Financial Times Series.

In: Yolum, p., Güngör, T., Gürgen, F., Özturan, C. (eds.) ISCIS 2005. LNCS, vol. 3733,

pp. 565–574. Springer, Heidelberg (2005)

7. Chen, W.H., Sheh, J.Y., Wu, S.: Comparison of Support Vector Machines and Back

Propagation Neural Networks in forecasting the six major Asian Stock Markets. Int. J.

Electronic Finance 1(1), 49–67 (2006)

8. Singhal, N.: Stock Price Prediction for Indian Market, Master, Thesis. Department of

Computer Science and Engineering. Indian Institute of Technology, Delhi, India (2008)

9. National Stock Exchange of India Ltd., Data Products NCFMOnline ReportCBT,

http://www.nseindia.com

10. LS-SVM, package. Home Toolbox Book People Publications Faq Links,

http://www.esat.kuleuven.ac.be/sista/lssvmlab

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