Machine learning in stock indices trading and pairs trading

Xiangyu Zong
This thesis focuses on two fields of machine learning in quantitative trading. The first field uses machine learning to forecast financial time series (Chapters 2 and 3), and then builds a simple trading strategy based on the forecast results. The second (Chapter 4) applies machine learning to optimize decision-making for pairs trading. In Chapter 2, a hybrid Support Vector Machine (SVM) model is proposed and applied to the task of forecasting the daily returns of five popular stock indices in
more » ... r stock indices in the world, including the S&P500, NKY, CAC, FTSE100 and DAX. The trading application covers the 1997 Asian financial crisis and 2007-2008 global financial crisis. The originality of this work is that the Binary Gravity Search Algorithm (BGSA) is utilized, in order to optimize the parameters and inputs of SVM. The results show that the forecasts made by this model are significantly better than the Random Walk (RW), SVM, best predictors and Buy-and-Hold. The average accuracy of BGSA-SVM for five stock indices is 52.6%-53.1%. The performance of the BGSA-SVM model is not affected by the market crisis, which shows the robustness of this model. In general, this study proves that a profitable trading strategy based on BGSA-SVM prediction can be realized in a real stock market. Chapter 3 focuses on the application of Artificial Neural Networks (ANNs) in forecasting stock indices. It applies the Multi-layer Perceptron (MLP), Convolution Neural Network (CNN) and Long Short-Term Memory (LSTM) neural network to the task of forecasting and trading FTSE100 and INDU indices. The forecasting accuracy and trading performances of MLP, CNN and LSTM are compared under the binary classifications architecture and eight classifications architecture. Then, Chapter 3 combines the forecasts of three ANNs (MLP, CNN and LSTM) by Simple Average, Granger-Ramanathan's Regression Approach (GRR) and the Least Absolute Shrinkage and Selection Operator (LASSO). Finally, this chapter uses different leverage ratios in trading according to the different dail [...]
doi:10.5525/gla.thesis.82188 fatcat:ykinbzqadrdz7oyqhhhxeerr2u