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Neural network linear forecasts for stock returns

Kanas, Angelos (2001) Neural network linear forecasts for stock returns. International Journal of Finance & Economics, 6 (3). pp. 245-254. (doi:10.1002/ijfe.156) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)
Official URL
http://dx.doi.org/10.1002/ijfe.156

Abstract

We examine the out-of-sample performance of monthly returns forecasts for the Dow Jones and the FT, using a linear and an artificial neural network (ANN) model. The comparison of out-of-sample forecasts is done on the basis of directional accuracy, using the Pesaran and Timmermann (1992. A simple nonparametric test of predictive performance, Journal of Business and Economic Statistics10: 461–465) test, and forecast encompassing, using the Clements and Hendry (1998. Forecasting Economic Time Series. Cambridge University Press: Cambridge, UK) approach. While both models perform badly in terms of predicting the directional change of the two indices, the ANN forecasts can explain the forecast errors of the linear model while the linear model cannot explain the forecast errors of the ANN for both indices. Thus, the ANN forecasts are preferable to linear forecasts, indicating that the inclusion of nonlinear terms in the relation between stock returns and fundamentals is important in out-of-sample forecasting. This conclusion is consistent with the view that the underlying relation between stock returns and fundamentals is nonlinear.

Item Type: Article
DOI/Identification number: 10.1002/ijfe.156
Uncontrolled keywords: artificial neural networks; directional accuracy; dividends; forecast encompassing; nonlinearity; stock returns; trading volume G12
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Tracey Pemble
Date Deposited: 23 May 2014 09:15 UTC
Last Modified: 29 May 2019 12:36 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/41172 (The current URI for this page, for reference purposes)
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