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A novel Hybrid RBF Neural Networks model as a forecaster

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Abstract

We introduce a novel predictive statistical modeling technique called Hybrid Radial Basis Function Neural Networks (HRBF-NN) as a forecaster. HRBF-NN is a flexible forecasting technique that integrates regression trees, ridge regression, with radial basis function (RBF) neural networks (NN). We develop a new computational procedure using model selection based on information-theoretic principles as the fitness function using the genetic algorithm (GA) to carry out subset selection of best predictors. Due to the dynamic and chaotic nature of the underlying stock market process, as is well known, the task of generating economically useful stock market forecasts is difficult, if not impossible. HRBF-NN is well suited for modeling complex non-linear relationships and dependencies between the stock indices. We propose HRBF-NN as our forecaster and a predictive modeling tool to study the daily movements of stock indices. We show numerical examples to determine a predictive relationship between the Istanbul Stock Exchange National 100 Index (ISE100) and seven other international stock market indices. We select the best subset of predictors by minimizing the information complexity (ICOMP) criterion as the fitness function within the GA. Using the best subset of variables we construct out-of-sample forecasts for the ISE100 index to determine the daily directional movements. Our results obtained demonstrate the utility and the flexibility of HRBF-NN as a clever predictive modeling tool for highly dependent and nonlinear data.

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Acknowledgements

This work was supported by Scientific Research Projects Coordination Unit of Istanbul University under project number 17708. We further acknowledge the valuable comments of the three anonymous referees and the Associate Editor which resulted to a much improved paper.

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Authors and Affiliations

  1. Istanbul University School of Business Administration, Istanbul, Turkey

    Oguz Akbilgic & M. Erdal Balaban

  2. Statistics, Operations, and Management Science, and Center for Intelligent Systems and Machine Learning (CISML), The University of Tennessee, Knoxville, 37996, USA

    Hamparsum Bozdogan

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  1. Oguz Akbilgic
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  2. Hamparsum Bozdogan
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  3. M. Erdal Balaban
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Correspondence to Oguz Akbilgic.

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Akbilgic, O., Bozdogan, H. & Balaban, M.E. A novel Hybrid RBF Neural Networks model as a forecaster. Stat Comput 24, 365–375 (2014). https://doi.org/10.1007/s11222-013-9375-7

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