Forecasting Stock Index Movement: A Comparison of Support Vector Machines and Random Forest

16 Pages Posted: 24 Jan 2006

See all articles by Manish Kumar

Manish Kumar

Indian Institute of Technology Madras

M. Thenmozhi

Indian Institute of Technology Madras

Abstract

There exists vast research articles which predict the stock market as well pricing of stock index financial instruments but most of the proposed models focus on the accurate forecasting of the levels (i.e. value) of the underlying stock index. There is a lack of studies examining the predictability of the direction/sign of stock index movement. Given the notion that a prediction with little forecast error does not necessarily translate into capital gain, this study is an attempt to predict the direction of S&P CNX NIFTY Market Index of the National Stock Exchange, one of the fastest growing financial exchanges in developing Asian countries. Random forest and Support Vector Machines (SVM) are very specific type of machine learning method, and are promising tools for the prediction of financial time series. The tested classification models, which predict direction, include linear discriminant analysis, logit, artificial neural network, random forest and SVM. Empirical experimentation suggests that the SVM outperforms the other classification methods in terms of predicting the direction of the stock market movement and random forest method outperforms neural network, discriminant analysis and logit model used in this study.

Keywords: Support vector machine, Random forest, Forecasting, Stock index

Suggested Citation

Kumar, Manish and Thenmozhi, M., Forecasting Stock Index Movement: A Comparison of Support Vector Machines and Random Forest. Indian Institute of Capital Markets 9th Capital Markets Conference Paper. Available at SSRN: https://ssrn.com/abstract=876544 or http://dx.doi.org/10.2139/ssrn.876544

Manish Kumar (Contact Author)

Indian Institute of Technology Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu
India

M. Thenmozhi

Indian Institute of Technology Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu
India

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