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Recognizing and forecasting the sign of financial local trends using hidden Markov models

Bicego, Manuele and Grosso, Enrico and Otranto, Edoardo (2008) Recognizing and forecasting the sign of financial local trends using hidden Markov models. Cagliari, CRENoS. p. 15 (Working Papers CRENoS, 2008, 03). Working Paper.

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Abstract

The problem of forecasting financial time series has received great attention in the past, from both Econometrics and Pattern Recognition researchers. In this context, most of the efforts were spent to represent and model the volatility of the financial indicators in long time series. In this paper a different problem is faced, the prediction of increases and decreases in short (local) financial trends. This problem, poorly considered by the researchers, needs specific models, able to capture the movement in the short time and the asymmetries between increase and decrease periods. The methodology presented in this paper explicitly considers both aspects, encoding the financial returns in binary values (representing the signs of the returns), which are subsequently modelled using two separate Hidden Markov models, one for increases and one for decreases, respectively. The approach has been tested with different experiments with the Dow Jones index and other shares of the same market of different risk, with encouraging results.

Item Type:Working Paper
ID Code:22
Status:Published
Uncontrolled Keywords:Markov models, asymmetries, binary data, short-time forecasts
Subjects:Area 13 - Scienze economiche e statistiche > SECS-S/01 Statistica
Area 09 - Ingegneria industriale e dell'informazione > ING-INF/05 Sistemi di elaborazione delle informazioni
Divisions:002 Altri enti e centri di ricerca del Nord Sardegna > CRENoS-Centro Ricerche Economiche Nord Sud, Università di Cagliari e Università di Sassari
001 Università di Sassari > 01 Dipartimenti > Economia, impresa, regolamentazione
Publisher:CRENoS
Publisher Policy:Depositato per gentile concessione del CRENoS
Deposited On:18 Aug 2009 10:01

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