Improving Stock Return Forecasting by Deep Learning Algorithm

Document Type: Research Paper

Authors

1 Departments of Economics, College of Humanities, Kermanshah Branch, Islamic Azad University, Kermanshah, Iran.

2 Institute for Financial Markets, Leibniz University Hannover, Hannover, Germany.

10.22034/amfa.2019.584494.1173

Abstract

Improving return forecasting is very important for both investors and researchers in financial markets. In this study we try to aim this object by two new methods. First, instead of using traditional variable, gold prices have been used as predictor and compare the results with Goyal's variables. Second, unlike previous researches new machine learning algorithm called Deep learning (DP) has been used to improve return forecasting and then compare the results with historical average methods as bench mark model and use Diebold and Mariano’s and West’s statistic (DMW) for statistical evaluation. Results indicate that the applied DP model has higher accuracy compared to historical average model. It also indicates that out of sample prediction improvement does not always depend on high input variables numbers. On the other hand when using gold price as input variables, it is possible to improve this forecasting capability. Result also indicate that gold price has better accuracy than Goyal's variable to predicting out of sample return.

Keywords

Main Subjects


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