Adaptive Logic Network, Arima, and Linear Regression Forecasts of International Equity Markets During the Crash of October 1987

Posted: 7 Jan 1999

See all articles by Kenneth O. Cogger

Kenneth O. Cogger

University of Kansas

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Diane M. Lander

Saint Michael's College; Southern New Hampshire University - School of Business

Date Written: December 1994

Abstract

The purpose of this study is to investigate how Artificial Neural Network forecasts, specifically Adaptive Logic Network (ALN) forecasts, compare to those of linear regression (LR) and ARIMA models when analyzing international stock market movements during the crash of October 1987. The results of this methodological study show: 1) ALN forecasts give, on average, 16.5% mean square error (MSE) improvement over the LR forecasts; 2) the MSE of the ALN models compared to the MSE of the ARIMA models is comparable or smaller, depending on the country; and 3) in four of five cases, ALN forecasts have a lower bias component than do ARIMA forecasts. A Theil decomposition reveals a sizeable systematic error component of MSE in all forecast profiles, suggesting the potential for improving forecast performance with an expanded ALN model, which is not possible with univariate ARIMA models.

JEL Classification: C22, C51, C52, F47

Suggested Citation

Cogger, Kenneth O. and Koch, Paul D. and Lander, Diane M., Adaptive Logic Network, Arima, and Linear Regression Forecasts of International Equity Markets During the Crash of October 1987 (December 1994). Available at SSRN: https://ssrn.com/abstract=6102

Kenneth O. Cogger

University of Kansas ( email )

1415
Lawrence, KS 66045
United States

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

Diane M. Lander (Contact Author)

Saint Michael's College

One Winooski Park
Colchester, VT 05439
United States
802-654-2000 (Phone)

HOME PAGE: http://www.smcvt.edu

Southern New Hampshire University - School of Business ( email )

2500 North River Road
Manchester, NH 03106-1045
United States
603-668-2211 x 3325 (Phone)
603-645-9737 (Fax)

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