Computational Intelligence in Economics and Finance

by Chen, Shu-Heng; Wang, Paul P.

• ISBN13: 9783540440987
• ISBN10: 3540440984
• Format: Hardcover
• Copyright: 2003-12-01
• Publisher: Springer Verlag

Summary

Due to the ability to handle specific characteristics of economics and finance forecasting problems like e.g. non-linear relationships, behavioral changes, or knowledge-based domain segmentation, we have recently witnessed a phenomenal growth of the application of computational intelligence methodologies in this field. In this volume, Chen and Wang collected not just works on traditional computational intelligence approaches like fuzzy logic, neural networks, and genetic algorithms, but also examples for more recent technologies like e.g. rough sets, support vector machines, wavelets, or ant algorithms. After an introductory chapter with a structural description of all the methodologies, the subsequent parts describe novel applications of these to typical economics and finance problems like business forecasting, currency crisis discrimination, foreign exchange markets, or stock markets behavior.

Table of Contents

Part I. Introduction
Computational Intelligence in Economics and Finance	3	(56)
Shu-Heng Chen
Paul P. Wang
What Is Computational Intelligence?	4	(6)
Fuzzy Logic and the Related Disciplines	10	(4)
Fuzzy Logic	10	(2)
Rough Sets	12	(1)
Grey Forecasting	13	(1)
Neural Networks and Related Disciplines	14	(19)
Artificial Neural Networks	14	(4)
Support Vector Machines	18	(2)
Self-organizing Maps	20	(2)
Finite State Automata	22	(3)
Decision Trees	25	(3)
K Nearest Neighbors	28	(2)
Hidden Markov	30	(1)
Fourier Transforms and Wavelet Transforms	30	(3)
Evolutionary Computation and the Related Disciplines	33	(10)
Evolutionary Computation: the Common Features	33	(3)
Evolutionary Strategies	36	(2)
Evolutionary Programming	38	(1)
Genetic Algorithms and Genetic Programming	39	(1)
Simulated Annealing	39	(1)
Ant Algorithms	40	(3)
State-Space Approach	43	(2)
Application Domains	45	(1)
Performance Evaluation	46	(3)
Prediction	47	(1)
Classification	47	(1)
Trading	48	(1)
Function Optimization	49	(1)
Concluding Remarks: Agent-Based Models	49	(10)
References	51	(8)
Part II. Fuzzy Logic and Rough Sets
Intelligent System to Support Judgmental Business Forecasting: the Case of Estimating Hotel Room Demand	59	(34)
Mounir Ben Ghalia
Paul P. Wang
Introduction	59	(3)
Revenue Management System for Hotels	62	(2)
Demand Forecasting as Part of RMS	64	(1)
Optimization	64	(1)
Forecasting Using Statistical Techniques	64	(3)
Statistical Forecasting Techniques	64	(1)
Application to the Estimation of Hotel Room Demand	65	(1)
Limitations of Statistical Forecasting	66	(1)
Judgmental Forecasting in the Hotel Industry	67	(2)
What Do Hotel Managers Know?	67	(2)
How Can Informed Judgmental Forecasting Help Increase Revenue?	69	(1)
Knowledge Engineering for IS-JFK	69	(3)
Unstructured Interviews	70	(1)
Structured Interviews	70	(1)
Follow-up Questionnaires	71	(1)
Protocol Extraction	71	(1)
Knowledge Analysis and Representation	72	(1)
Intelligent System to Support Judgmental Forecast and Knowledge (IS-JFK)	72	(3)
Fuzzification	73	(1)
Knowledge Base	74	(1)
Database	74	(1)
User Support Engine	74	(1)
Approximate Reasoning Engine	74	(1)
Defuzzification	75	(1)
Forecast Adjustment Using a Direct Approach	75	(8)
Fuzzy If-Then Rules for the Direct Approach	75	(2)
Example 1	77	(6)
Fuzzy Adjustment via Fuzzy Intervention Analysis	83	(6)
Intervention Models	83	(3)
Fuzzy Intervention Models	86	(2)
Example 2	88	(1)
Conclusion	89	(4)
References	91	(2)
Fuzzy Investment Analysis Using Capital Budgeting and Dynamic Programming Techniques	93	(36)
Cengiz Kahraman
Cafer Erhan Bozdag
Introduction	93	(3)
Fuzzy Present Value (PV) Method	96	(1)
Fuzzy Capitalized Value Method	97	(1)
Fuzzy Future Value Method	98	(1)
Fuzzy Benefit/Cost Ratio Method	99	(1)
Fuzzy Equivalent Uniform Annual Value (EUAV) Method	100	(1)
Fuzzy Payback Period (FPP) Method	100	(1)
Ranking Fuzzy Numbers	101	(1)
Fuzzy Internal Rate of Return (IRR) Method	102	(2)
An Expansion to Geometric and Trigonometric Cash Flows	104	(5)
Geometric Series-Fuzzy Cash Flows in Discrete Compounding	104	(1)
Geometric Series-Fuzzy Cash Flows in Continuous Compounding	105	(1)
Trigonometric Series-Fuzzy Continuous Cash Flows	106	(1)
Numeric Example I	107	(1)
Numeric Example II	108	(1)
Dynamic Programming for Multilevel Investment Analysis	109	(15)
Fuzzy Dynamic Programming: Literature Review	111	(2)
Crisp Dynamic Programming for Multilevel Investments	113	(1)
Fuzzy Dynamic Programming for Multilevel Investments	114	(1)
A Numeric Example	115	(9)
Conclusions	124	(5)
References	125	(2)
Appendix	127	(2)
Rough Sets Theory and Multivariate Data Analysis in Classification Problems: a Simulation Study	129	(22)
Michael Doumpos
Constantin Zopounidis
Introduction	129	(1)
Outline of the Rough Sets Approach	130	(4)
Experimental Design	134	(3)
Results	137	(6)
Conclusions	143	(8)
References	145	(6)
Part III. Artificial Neural Networks and Support Vector Machines
Forecasting the Opening Cash Price Index in Integrating Grey Forecasting and Neural Networks: Evidence from the SGX-DT MSCI Taiwan Index Futures Contracts	151	(20)
Tian-Shyug Lee
Nen-Jing Chen
Chih-Chou Chiu
Introduction	151	(2)
Literature Review	153	(1)
Lead-Lag Relationship between Index Futures and Cash Markets	153	(1)
Market Trading Characteristics at the Opening and Closing Stage	153	(1)
Neural Networks and Grey Theory	154	(5)
Neural Networks	154	(2)
Grey Model and Grey Forecasting	156	(3)
Empirical Results and Discussion	159	(5)
Grey Forecasting Model	159	(2)
Neural Networks Forecasting Model	161	(3)
Robustness Evaluation of the Neural Networks Model	164	(1)
Conclusions and Areas of Future Research	165	(6)
References	169	(2)
A Support Vector Machine Model for Currency Crises Discrimination	171	(11)
Claudio M. Rocco
Jose Ali Moreno
Introduction	171	(1)
Definition of a Currency Crisis	171	(1)
Support Vector Machines (SVMs)	172	(6)
Linear SVM	173	(3)
Nonlinear SVM	176	(1)
Imperfect Separation	177	(1)
SVM Properties	177	(1)
Example	178	(1)
Conclusions	179	(3)
References	180	(2)
Saliency Analysis of Support Vector Machines for Feature Selection in Financial Time Series Forecasting	182	(21)
Lijuan Cao
Francis E. H. Tay
Introduction	182	(2)
Theory of Support Vector Machines (SVMs) for Regression Estimation	184	(2)
Saliency Analysis of SVMs	186	(3)
Deriving the Sensitivity	187	(1)
Removing Irrelevant Features	188	(1)
Experiments	189	(6)
Simulated Data	189	(3)
Real Financial Data	192	(3)
Conclusions	195	(8)
References	199	(4)
Part IV. Self-organizing Maps and Wavelets
Searching Financial Patterns with Self-organizing Maps	203	(14)
Shu-Heng Chen
Hongxing He
Motivation and Introduction	203	(1)
Self-organizing Maps	204	(2)
Charts Constructed by SOM	206	(3)
Do SOM-Induced Charts Reveal Trading Signals?	209	(3)
SOM-Induced Trading Strategies	212	(3)
Concluding Remarks	215	(2)
References	216	(1)
Effective Position of European Firms in the Face of Monetary Integration Using Kohonen's SOFM	217	(17)
Raquel Florez Lopez
The Economic and Monetary Union Process	217	(2)
ANNs and SOFMs	219	(2)
Artificial Neural Networks	219	(1)
Self-organizing Maps	220	(1)
Empirical Analysis	221	(8)
The BACH Database	221	(1)
Economic Analysis (I): Cost Analysis	222	(4)
Economic Analysis (II): Profitability Analysis	226	(3)
Conclusions	229	(5)
References	232	(2)
Financial Applications of Wavelets and Self-organizing Maps	234	(19)
Dimitrios Moshou
Herman Ramon
Introduction	234	(1)
Wavelets	235	(1)
Wavelet Packets	236	(1)
Wavelet-Based Denoising	237	(1)
Self-organizing Map	238	(2)
Wavelet-Based Denoising of Financial Data	240	(1)
SOM and Wavelet Combination for Abnormality Detection	241	(7)
Conclusions	248	(5)
References	248	(5)
Part V. Sequence Matching and Feature-Based Time Series Models
Pattern Matching in Multidimensional Time Series	253	(9)
Arnold Polanski
Introduction	253	(1)
String Search in a Time Series	254	(1)
The Pattern Description Language (PDL)	255	(2)
The Pattern Matching Machine (PMM)	257	(1)
An Application	258	(2)
Conclusions and Further Research	260	(2)
References	261	(1)
Structural Pattern Discovery in Time Series Databases	262	(26)
Weiqiang Lin
Mehmet A. Orgun
Graham J. Williams
Introduction	262	(1)
Discrete-Valued Time Series Examples and Their Models	263	(2)
Some Examples in Discrete-Valued Time Series	264	(1)
Discrete-Valued Series Models	264	(1)
Local Polynomial and Hidden Markov Modeling	265	(5)
Definitions and Basic Models	265	(3)
Hidden Markov Models	268	(1)
Local Polynomial Modeling	268	(2)
Local Polynomial Hidden Markov Models	270	(3)
Modeling DTS	270	(1)
Structural Pattern Discovery	271	(1)
Value-Point Pattern Discovery	271	(1)
Local Polynomial Hidden Markov Model for Pattern Discovery (LPHMM)	272	(1)
Experimental Results	273	(10)
Structural Pattern Searching	274	(4)
Value-Point Pattern Searching	278	(2)
LPHMM for Pattern Searching	280	(3)
Related Work	283	(2)
Concluding Remarks	285	(3)
References	285	(3)
Are Efficient Markets Really Efficient?: Can Financial Econometric Tests Convince Machine-Learning People?	288	(9)
Shu-Heng Chen
Tzu-Wen Kuo
Introduction	288	(1)
Cubist	289	(1)
Data Description	290	(4)
Experimental Results	294	(1)
Conclusions	295	(2)
References	296	(1)
Nearest-Neighbour Predictions in Foreign Exchange Markets	297	(32)
Fernando Fernandez-Rodriguez
Simon Sosvilla-Rivero
Julian Andrada-Felix
Introduction	297	(2)
The NN Approach to Nonlinear Forecasting	299	(6)
Literature Review	299	(2)
The Approach in this Paper	301	(3)
Selecting the Key Parameters in (S)NN Predictions	304	(1)
The European Monetary System	305	(1)
Assessing the Forecast Accuracy of the NN Predictors	306	(6)
Assessing the Economic Value of the NN Predictors	312	(8)
Concluding Remarks	320	(9)
References	320	(9)
Part VI. Evolutionary Computation, Swarm Intelligence and Simulated Annealing
Discovering Hidden Patterns with Genetic Programming	329	(19)
Shu-Heng Chen
Tzu-Wen Kuo
Discovering the Hidden Law of Motion	329	(5)
Deterministic Chaotic Processes	330	(4)
Nonlinear Stochastic Time Series	334	(1)
Statistical Behavior of Genetic Programming	334	(3)
Kaboudan's Predictability Test	334	(2)
The Fitted Residuals of GP	336	(1)
Discovering the Technical Trading Rules	337	(9)
Foreign Exchange Markets	338	(2)
Stock Markets	340	(4)
Futures	344	(2)
Concluding Remarks	346	(2)
References	346	(2)
Numerical Solutions to a Stochastic Growth Model Based on the Evolution of a Radial Basis Network	348	(10)
Fernando Alvarez
Nestor Carrasquero
Claudio Rocco
Introduction	348	(1)
Proposed Method	349	(3)
Experiments and Results	352	(3)
Conclusions	355	(3)
References	357	(1)
Evolutionary Strategies vs. Neural Networks: an Inflation Forecasting Experiment	358	(11)
Graham Kendall
Jane M. Binner
Alicia M. Gazely
Introduction	358	(1)
Evolutionary Strategies	359	(1)
Data and Model Specification	360	(2)
Testing and Results	362	(5)
Concluding Remarks	367	(2)
References	368	(1)
Business Failure Prediction Using Modified Ants Algorithm	369	(18)
Chunfeng Wang
Xin Zhao
Li Kang
Introduction	369	(2)
Ants Algorithm	371	(4)
Main Idea of the Ants Algorithm	371	(1)
The Improvement of the Ants Algorithm	372	(3)
Computation Experiment	375	(2)
Data and Variables	375	(1)
The Statistic Characteristic of Data Sets	375	(2)
Discretization of Data	377	(1)
The Application of the Ants Algorithm in the Classification Problem	378	(3)
Constructing the Objective Function	378	(1)
The Description of the Application	379	(2)
Implementation	381	(1)
The Parameters of the Ants Algorithm	381	(1)
The Partition Rule and Results	381	(1)
Discussions	382	(3)
Classification Accuracy	382	(1)
External Validity	382	(1)
Explanatory Ability	383	(1)
Compared with the Original Ants Algorithm	383	(1)
The Reduction of the Algorithm's Parameter	384	(1)
Dynamic Update Mechanism	384	(1)
The Termination Criterion	384	(1)
Computation Efficiency	384	(1)
Conclusion	385	(2)
References	385	(2)
Towards Automated Optimal Equity Portfolios Discovery in a Financial Knowledge Management System	387	(18)
Yi-Chuan Lu
Hilary Cheng
Introduction	387	(1)
A Case Study as Motivation	388	(1)
FKMS: A Knowledge Management Solution	389	(2)
Data Management	391	(2)
Defining Metadata	391	(1)
Data Conversion	392	(1)
Data Cube Creation	392	(1)
Knowledge Discovery via Data Mining Technique	393	(5)
Multifactor Equity Portfolio Management Issues	394	(1)
Objective Function and Constraints	394	(1)
Adaptive Random Search	395	(3)
Implementation and Results	398	(2)
Portfolio Simulation	399	(1)
Results	399	(1)
Knowledge Discovery -- with Other Data Mining Applications	400	(5)
References	401	(4)
Part VII. State Space Modeling of Time Series
White Noise Tests and Synthesis of APT Economic Factors Using TFA	405	(15)
Kai Chun Chiu
Lei Xu
Introduction	405	(1)
The Arbitrage Pricing Theory	406	(1)
Temporal Factor Analysis	406	(3)
An Overview of TFA	406	(2)
Model Selection vs. Appropriate Number of Factors	408	(1)
Grounds and Benefits for Using TFA in APT Analysis	408	(1)
Testability of the TFA Model	408	(1)
Tests of White Noise Residuals	409	(4)
Data Considerations	409	(1)
Test Statistics	409	(1)
Empirical Results	410	(3)
Synthesis of Economic Factors	413	(5)
Methodology and Test Statistics	415	(1)
Empirical Results	416	(2)
Conclusion	418	(2)
References	418	(2)
Learning and Monetary Policy in a Spectral Analysis Representation	420	(16)
Andrew Hughes Hallett
Christian R. Richter
Introduction	420	(2)
The Relationship Between the Time Domain and the Frequency Domain	422	(4)
Spectra and Cross-spectra in Our Analysis	422	(2)
Confidence Intervals	424	(1)
The Indirect Estimation Technique	425	(1)
Econometric Implementation: a Time-Varying Approach to the Term Structure of Interest Rates	426	(2)
Empirical Results	428	(6)
Results in the Time Domain	428	(1)
The Gain and the Phase Shifts in the Implementation of British Monetary Policy 1992--98	429	(3)
The Risk Premium on the UK Interest Rate	432	(2)
Conclusion	434	(2)
References	434	(2)
International Transmission of Business Cycles: a Self-organizing Markov-Switching State-Space Model	436	(13)
Morikazu Hakamata
Genshirou Kitagawa
Introduction	436	(1)
Monte Carlo Filter/Smoother	437	(3)
General State-Space Model	437	(1)
Sequential Monte Carlo Filter/Smoother	438	(2)
Self-organizing State-Space Model and Self-Tuning of Parameters	440	(1)
Self-organizing Markov-Switching State-Space Model	441	(3)
Application	444	(1)
Data	444	(1)
Results	444	(1)
Conclusions	445	(4)
References	446	(3)
Part VIII. Agent-Based Models
How Information Technology Creates Business Value in the Past and in the Current Electronic Commerce (EC) Era	449	(18)
Yasuo Kadono
Takao Terano
Introduction	449	(1)
Framework of 3C-Drive	450	(4)
Vertical Axis	451	(2)
Horizontal Axis	453	(1)
Survey of Existing Research and Perspectives	454	(5)
Perspective of Direct Quantitative Comparison of IT Investment and Value	455	(1)
Perspective of Information Economics	456	(1)
Perspective of Alignment Approach	456	(2)
Perspective of IT-Organization Correlation	458	(1)
Other Perspectives	459	(1)
Simulation Study and Results	459	(5)
Simulation Objectives and Experimental Setup	459	(1)
Descriptions of Competitive Environments	460	(1)
Characteristics of the Agents	461	(1)
Action Rules of the Agents	461	(1)
Simulation Results	461	(3)
Conclusion	464	(3)
References	465	(2)
Author Index	467	(1)
Subject Index	468