Artificial Neural Networks | Communications Dissertation

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Abstract

This dissertation examines and analyzes the use of the Artificial Neural Networks (ANN) to forecast the London Stock Exchange. Specifically the importance of ANN to predict the future trends and value of the financial market is demonstrated. There are several contributions of this study to this area. The first contribution of this study is to find the best subset of the interrelated factors at both local and international levels that affect the London stock exchange from the various input variables to be used in the future studies.

We use novel aspects, in the sense that we base the forecast on both the fundamental and technical analysis.The second contribution of this study was to provide well defined methodology that can be used to create the financial models in future studies. In addition, this study also gives various theoretical arguments in support of the approaches used in the construction of the forecasting model by comparing the results of the previous studies and modifying some of the existing approaches and tested them. The study also compares the performance of the statistical methods and ANN in the forecasting problem. The main contribution of this thesis lies in comparing the performance of the five different types of ANN by constructing the individual forecasting model of them.

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Accuracy of models is compared by using different evaluation criteria and we develop different forecasting models based on both the direction and value accuracy of the forecasted value. The fourth contribution of this study is to investigate whether the hybrid approach combining different individual forecasting models can outperform the individual forecasting models and compare the performance of the different hybrid approaches. Three hybrid approaches are used in this study, two are existing approaches and the third original approach, the mixed combined neural network -is being proposed in this study to the academic studies to forecast the stock exchange. The last contribution of this study lies in modifying the existing trading strategy to increase the profitability of the investor and support the argument that the investor earns more profit if the forecasting model is being developed by using the direction accuracy as compared to the value accuracy.

The best forecasting classification accuracy obtained is 93% direction accuracy and 0.0000831 (MSE) value accuracy which are better than the accuracies obtained by the previous academic studies. Moreover, this research validates the work of the existing studies that hybrid approach outperforms the individual forecasting model. In addition, the rate of the return that was attained in this thesis by using modified trading strategy is 120.14% which has shown significant improvement as compared to the 10.8493% rate of return of the existing trading strategy in other academics studies. The difference in the rate of return could be due to the fact that this study has developed good forecasting model or a better trading strategy.

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