THE quest for alpha : can artificial neural networks help?

Basu, Anup K. & Ashwood, Andrew J. (2014) THE quest for alpha : can artificial neural networks help? JASSA, March(1), pp. 13-18.

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Abstract

The application of artificial neural networks (ANN) in finance is relatively new area of research. We employed ANNs that used both fundamental and technical inputs to predict future prices of widely held Australian stocks and used these predicted prices for stock portfolio selection over a 10-year period (2001-2011). We found that the ANNs generally do well in predicting the direction of stock price movements. The stock portfolios selected by the ANNs with median accuracy are able to generate positive alpha over the 10-year period. More importantly, we found that a portfolio based on randomly selected network configuration had zero chance of resulting in a significantly negative alpha but a 27% chance of yielding a significantly positive alpha. This is in stark contrast to the findings of the research on mutual fund performance where active fund managers with negative alphas outnumber those with positive alphas.

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ID Code: 70062
Item Type: Journal Article
Refereed: No
Additional URLs:
ISSN: 0313-5934
Subjects: Australian and New Zealand Standard Research Classification > INFORMATION AND COMPUTING SCIENCES (080000) > ARTIFICIAL INTELLIGENCE AND IMAGE PROCESSING (080100) > Neural Evolutionary and Fuzzy Computation (080108)
Australian and New Zealand Standard Research Classification > INFORMATION AND COMPUTING SCIENCES (080000) > ARTIFICIAL INTELLIGENCE AND IMAGE PROCESSING (080100) > Simulation and Modelling (080110)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2014 Finsia
Deposited On: 10 Apr 2014 23:17
Last Modified: 11 Oct 2014 03:33

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