Evaluating Direction-of-Change Forecasting: Neurofuzzy Models vs. Neural Networks

22 Pages Posted: 28 Feb 2005

See all articles by Stelios Bekiros

Stelios Bekiros

European University Institute - Economics Department (ECO); IPAG Business School; Athens University of Economics and Business; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Dimitris A. Georgoutsos

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: January 2005

Abstract

This paper investigates the nonlinear predictability of technical trading rules based on a recurrent neural network as well as a neurofuzzy model. The efficiency of the trading strategies was considered upon the prediction of the direction of the market in case of NASDAQ and NIKKEI returns. The sample extends over the period 2/8/1971 - 4/7/1998 while the sub-period 4/8/1998 - 2/5/2002 has been reserved for out-of-sample testing purposes. Our results suggest that, in absence of trading costs, the return of the proposed neurofuzzy model is consistenly superior to that of the recurrent neural model as well as of the buy & hold strategy for bear markets. On the other hand, we found that the buy & hold strategy produces in general higher returns than neurofuzzy model or neural networks for bull periods. The proposed neurofuzzy model which outperforms the neural network predictor allows investors to earn significantly higher returns in bear markets.

Keywords: Forecasting, Neurofuzzy models, Neural networks

JEL Classification: G14, C53, C45

Suggested Citation

Bekiros, Stelios and Georgoutsos, Dimitris, Evaluating Direction-of-Change Forecasting: Neurofuzzy Models vs. Neural Networks (January 2005). Available at SSRN: https://ssrn.com/abstract=675623 or http://dx.doi.org/10.2139/ssrn.675623

Stelios Bekiros (Contact Author)

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
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50133 Florence
Italy

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Dimitris Georgoutsos

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece