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Forecasting high-frequency stock returns: a comparison of alternative methods

  • S.I.: Risk Management Decisions and Value under Uncertainty
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Abstract

We compare the performance of various advanced forecasting techniques, namely artificial neural networks, k-nearest neighbors, logistic regression, Naïve Bayes, random forest classifier, support vector machine, and extreme gradient boosting classifier to predict stock price movements based on past prices. We apply these methods with the high frequency data of 27 blue-chip stocks traded in the Istanbul Stock Exchange. Our findings reveal that among the selected methodologies, random forest and support vector machine are able to capture both future price directions and percentage changes at a satisfactory level. Moreover, consistent ranking of the methodologies across different time frequencies and train/test set partitions prove the robustness of our empirical findings.

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Notes

  1. Consequently, Fama (1970) classifies informative efficiency into three categories: (i) Weak efficiency, when the current price contains information from the past series of prices; (ii) Semi-strong efficiency, when the past price contains all the public information associated with that asset; and (iii) Strong efficiency, when the price reflects all public and private information relating to that asset.

  2. Being world’s 17th largest economy, Turkey has been a destination of extensive capital flows in the last few years and its stock market has attracted a lot of attention. With 614 TL bn. market capitalization and more than 1 TL tn. traded value at the end of 2016, equity market of Istanbul Stock Exchange is ranked 6th in traded value among all emerging markets in the world. Moreover, it is ranked 3rd in the whole world with a share turnover velocity of more than 200% in the same year. These statistics show that there is a high level of trading activity at a global scale in Istanbul Stock Exchange and makes it a perfect ground to test our trading strategies.

  3. See also Fornaciari and Grillenzoni (2017) and Ho et al. (2017).

  4. It was not possible to obtain this tick-by-tick data from data providers so the data comes directly from the database of the stock exchange. Since this is a unique data set, it was not possible the extend it beyond 2016.

  5. It is important to note that portfolios managed by financial institutions are very large and small abnormal returns (forecasting signs above 50% and profit ratio of 10%) could represent extra earnings worth millions of dollars. Similarly, trading thousands of times in a day with small abnormal returns would accumulate up to considerable amount of excess dollar gain in the market.

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Acknowledgements

Ahmet Sensoy gratefully acknowledges support from the Turkish Academy of Sciences under its Outstanding Young Scientist Program (TUBA-GEBIP).

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Authors and Affiliations

  1. Department of Banking and Finance, Burdur Mehmet Akif Ersoy University, Burdur, Turkey

    Erdinc Akyildirim

  2. Department of Banking and Finance, University of Zurich, Zurich, Switzerland

    Erdinc Akyildirim

  3. Department of Business, Universitat Rovira i Virgili, Reus, Spain

    Aurelio F. Bariviera

  4. IPAG Business School, Paris, France

    Duc Khuong Nguyen

  5. International School, Vietnam National University, Hanoi, Vietnam

    Duc Khuong Nguyen

  6. Faculty of Business Administration, Bilkent University, Ankara, Turkey

    Ahmet Sensoy

Authors
  1. Erdinc Akyildirim
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  2. Aurelio F. Bariviera
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  3. Duc Khuong Nguyen
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  4. Ahmet Sensoy
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Correspondence to Erdinc Akyildirim.

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Appendix A. Results for the ‘all trades’ scenario

Appendix A. Results for the ‘all trades’ scenario

This appendix presents some descriptive statistics and the results for our main forecasting techniques applied to ‘all trades’ instead of those occurring only in continuous matching session (Tables 2, 3, 4, 5, 6, 7, 8, 9 and 10).

Table 11 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 10 min frequency with 0.7/0.3 train/test set partition
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Table 12 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 30 min frequency with 0.7/0.3 train/test set partition
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Table 13 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 60 min frequency with 0.7/0.3 train/test set partition
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Table 14 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 10 min frequency with 0.8/0.2 train/test set partition
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Table 15 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 30 min frequency with 0.8/0.2 train/test set partition
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Table 16 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 60 min frequency with 0.8/0.2 train/test set partition
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Table 17 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 10 min frequency with 0.9/0.1 train/test set partition
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Table 18 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 30 min frequency with 0.9/0.1 train/test set partition
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Table 19 Sign prediction and ideal profit ratios of different machine learning algorithms for all trades, sampled at 60 min frequency with 0.9/0.1 train/test set partition
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Akyildirim, E., Bariviera, A.F., Nguyen, D.K. et al. Forecasting high-frequency stock returns: a comparison of alternative methods. Ann Oper Res 313, 639–690 (2022). https://doi.org/10.1007/s10479-021-04464-8

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