• DocumentCode
    3136334
  • Title

    Linear, adaptive and nonlinear trading models for Singapore stock market with random forests

  • Author

    Wang, Qing-Guo ; Li, Jin ; Qin, Qin ; Ge, Shuzhi Sam

  • Author_Institution
    Dept. of Electr. & Comput. Eng., Nat. Univ. of Singapore, Singapore, Singapore
  • fYear
    2011
  • fDate
    19-21 Dec. 2011
  • Firstpage
    726
  • Lastpage
    731
  • Abstract
    This paper presents various trading models for the stock market and test whether they are able to consistently generate excess returns from the Singapore Exchange (SGX). Instead of conventional ways of modeling stock prices, we construct models which relate the market indicators to a trading decision directly. Furthermore, unlike a reversal trading system or a binary system of buy and sell, we allow three modes of trades, namely, buy, sell or stand by, and the stand-by case is important as it caters to the market conditions where a model does not produce a strong signal of buy or sell. Linear trading models are first developed with the scoring technique which weights higher on successful indicators, as well as with the Least Squares technique which tries to match the past perfect trades with its weights. The linear models are then made adaptive by using the forgetting factor to address market changes. Because stock markets could be highly nonlinear sometimes, the decision trees with the Random Forest method are finally employed and they form nonlinear trading models. All the models are trained and evaluated on ten stocks traded on SGX over extended time periods and statistical tests such as randomness, linear and nonlinear correlations are conducted on the data to check the statistical significance of the inputs and their relation with the output before a model is trained. Our empirical results show that the proposed trading methods are able to generate excess returns compared with the buy-and-hold strategy.
  • Keywords
    decision trees; least squares approximations; pricing; random processes; statistical testing; stock markets; Singapore Exchange; Singapore stock market; adaptive trading model; buy-and-hold strategy; buy-and-sell binary system; decision tree; excess return generation; forgetting factor; least squares technique; linear trading model; market change; market condition; market indicator; nonlinear correlation; nonlinear trading model; random forest; randomness; reversal trading system; scoring technique; statistical significance; statistical test; stock price modeling; trading decision; trading method; Adaptation models; Correlation; Decision trees; Stock markets; Testing; Training; Vegetation;
  • fLanguage
    English
  • Publisher
    ieee
  • Conference_Titel
    Control and Automation (ICCA), 2011 9th IEEE International Conference on
  • Conference_Location
    Santiago
  • ISSN
    1948-3449
  • Print_ISBN
    978-1-4577-1475-7
  • Type

    conf

  • DOI
    10.1109/ICCA.2011.6137897
  • Filename
    6137897