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A Hidden Markov Model Approach to Classify and Predict the Sign of Financial Local Trends

  • Manuele Bicego
  • Enrico Grosso
  • Edoardo Otranto
Part of the Lecture Notes in Computer Science book series (LNCS, volume 5342)

Abstract

In the field of financial time series analysis it is widely accepted that the returns (price variations) are unpredictable in the long period [1]; nevertheless, this unappealing constraint could be somehow relaxed if sufficiently short time intervals are considered. In this paper this alternative scenario is investigated with a novel methodology, aimed at analyzing short (local) financial trends for predicting their sign (increase or decrease). This peculiar problem needs specific models – different from standard techniques used for estimating the volatility or the returns – able to capture the asymmetries between increase and decrease periods in the short time. This is achieved by modeling directly the signs of the local trends using two separate Hidden Markov models, one for positive and one for negative trends. The approach has been tested with different financial indexes, with encouraging results also in comparison with standard methods.

Keywords

Hide Markov Model Time Series Analysis Forecast Accuracy Price Variation Regime Switching 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2008

Authors and Affiliations

  • Manuele Bicego
    • 1
  • Enrico Grosso
    • 1
  • Edoardo Otranto
    • 1
  1. 1.DEIR - University of SassariSassariItaly

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