Support Vector Machines Approach to Predict the S&P CNX NIFTY Index Returns

19 Pages Posted: 13 Feb 2007

See all articles by Manish Kumar

Manish Kumar

Indian Institute of Technology Madras

M. Thenmozhi

Indian Institute of Technology Madras

Date Written: December 19, 2007

Abstract

The present study, investigates the predictability of S&P CNX NIFTY Index returns using Support vector machines (SVM). The performance of the SVM model in forecasting Nifty index returns is rigorously evaluated in terms of widely used statistical metrics like mean absolute error, root mean square error, normalized mean square error, correctness of sign and direction change (Pesaran and Timmermann (1992, DA test), and equal forecast accuracy using Diebold and Mariano (1995, DM test) by comparing its performance with those of neural network, random forest regression and a linear ARIMA model. The four competiting models are also examined in terms of various trading performance and economic criteria like annualized return, Sharpe ratio, maximum drawdown, annualized volatility, average gain/loss ratio etc via a trading experiment. The findings of the study reveal that SVM model achieves greater forecasting accuracy and improves prediction quality compared to other models experimented in the study. The SVM model can be used as an alternative forecasting tool for Nifty Index returns and it will lead to better returns based on the traditional forecasting accuracy measures, such as root mean squared errors, and financial criteria, such as risk-adjusted measures of return.

Keywords: ARIMA, Artificial neural network, Support vector machines, Random forest, Forecasting, Stock market

JEL Classification: C22, C45, C52, E17, G15

Suggested Citation

Kumar, Manish and Thenmozhi, M., Support Vector Machines Approach to Predict the S&P CNX NIFTY Index Returns (December 19, 2007). 10th Capital Markets Conference, Indian Institute of Capital Markets Paper, Available at SSRN: https://ssrn.com/abstract=962833 or http://dx.doi.org/10.2139/ssrn.962833

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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