A Case-Based Reasoning-Decision Tree Hybrid System for Stock Selection

Authors: Yaojun Wang, Yaoqing Wang

Abstract:

Stock selection is an important decision-making problem. Many machine learning and data mining technologies are employed to build automatic stock-selection system. A profitable stock-selection system should consider the stock’s investment value and the market timing. In this paper, we present a hybrid system including both engage for stock selection. This system uses a case-based reasoning (CBR) model to execute the stock classification, uses a decision-tree model to help with market timing and stock selection. The experiments show that the performance of this hybrid system is better than that of other techniques regarding to the classification accuracy, the average return and the Sharpe ratio.

Keywords: Case-based reasoning, decision tree, stock selection, machine learning.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1126415

References:

[1] Zhou R T, Lai R N. Herding and information based trading (J). Journal of Empirical Finance, 2009, 16(3): 388-93.
[2] Da Z, Schaumburg E. Relative valuation and analyst target price forecasts (J). Journal of Financial Markets, 2011, 14(1): 161-92.
[3] Atsalakis G S, Valavanis K P. Forecasting stock market short-term trends using a neuro-fuzzy based methodology (J). Expert Syst Appl, 2009, 36(7): 10696-707.
[4] Hanssens D M, Parsons L J, Schultz R L. Market response models: Econometric and time series analysis (M). Springer Science & Business Media, 2003.
[5] Dechow P M, Hutton A P, Meulbroek L, et al. Short-sellers, fundamental analysis, and stock returns (J). Journal of Financial Economics, 2001, 61(1): 77-106.
[6] Lau, Sie Ting, Chee Tong Lee, and Thomas H. McInish. "Stock returns and beta, firms size, E/P, CF/P, book-to-market, and sales growth: evidence from Singapore and Malaysia." Journal of multinational financial management 12.3 (2002): 207-222.
[7] Chan, Louis KC, and Josef Lakonishok. "Value and growth investing: Review and update." Financial Analysts Journal 60.1 (2004): 71-86.
[8] Graham, John R., and Campbell R. Harvey. "Market timing ability and volatility implied in investment newsletters' asset allocation recommendations." Journal of Financial Economics 42.3 (1996): 397-421.
[9] Henriksson, Roy D. "Market timing and mutual fund performance: An empirical investigation." Journal of business (1984): 73-96.
[10] Thompson G. Markets, hierarchies and networks: the coordination of social life (M). Sage, 1991.
[11] Bao D, Yang Z. Intelligent stock trading system by turning point confirming and probabilistic reasoning (J). Expert Syst Appl, 2008, 34(1): 620-7.
[12] Hafezi R, Shahrabi J, Hadavandi E. A bat-neural network multi-agent system (BNNMAS) for stock price prediction: Case study of DAX stock price (J). Applied Soft Computing, 2015, 29(196-210.
[13] Kao L-J, Chiu C-C, Lu C-J, et al. A hybrid approach by integrating wavelet-based feature extraction with MARS and SVR for stock index forecasting (J). Decision Support Systems, 2013, 54(3): 1228-44.
[14] Nair B B, Sai S G, Naveen A, et al. A GA-artificial neural network hybrid system for financial time series forecasting (M). Information Technology and Mobile Communication. Springer. 2011: 499-506.
[15] Svalina I, Galzina V, Lujić R, et al. An adaptive network-based fuzzy inference system (ANFIS) for the forecasting: The case of close price indices (J). Expert Syst Appl, 2013, 40(15): 6055-63.
[16] Chang P-C, Liu C-H. A TSK type fuzzy rule based system for stock price prediction (J). Expert Syst Appl, 2008, 34(1): 135-44.
[17] Zapranis A, Tsinaslanidis P E. A novel, rule-based technical pattern identification mechanism: Identifying and evaluating saucers and resistant levels in the US stock market (J). Expert Syst Appl, 2012, 39(7): 6301-8.
[18] Da Costa Pereira C, Tettamanzi A G. Fuzzy-evolutionary modeling for single-position day trading (M). Natural computing in computational finance. Springer. 2008: 131-59.
[19] Dourra H, Siy P. Investment using technical analysis and fuzzy logic (J). Fuzzy sets and systems, 2002, 127(2): 221-40.
[20] Ijegwa A D, Rebecca V O, Olusegun F, et al. A predictive stock market technical analysis using fuzzy logic (J). Computer and Information Science, 2014, 7(3): 1.
[21] Han J, Kamber M, Pei J. Data mining: concepts and techniques (M). Elsevier, 2011.
[22] Kwon, Ohbyung, Ghi Paul Im, and Kun Chang Lee. "MACE-SCM: A multi-agent and case-based reasoning collaboration mechanism for supply chain management under supply and demand uncertainties." Expert Systems with Applications 33.3 (2007): 690-705.
[23] Kim, Kyung-Sup, and Ingoo Han. "The cluster-indexing method for case-based reasoning using self-organizing maps and learning vector quantization for bond rating cases." Expert Systems with Applications 21.3 (2001): 147-156.
[24] Li, Hui, and Jie Sun. "Business failure prediction using hybrid 2 case-based reasoning (H 2 CBR)." Computers & Operations Research 37.1 (2010): 137-151.
[25] Allen, Bradley P. "Case-based reasoning: Business applications." Communications of the ACM 37.3 (1994): 40-43.
[26] Bryant, Stephanie M. "A case based reasoning approach to bankruptcy prediction modeling." Intelligent Systems in Accounting, Finance and Management 6.3 (1997): 195-214.
[27] Chun, Se-Hak, and Yoon-Joo Park. "Dynamic adaptive ensemble case-based reasoning: application to stock market prediction." Expert Systems with Applications 28.3 (2005): 435-443.
[28] Hall C A. Integrating Concepts and Models from Development Econoimcs with Land use Change in the Tropics (J). Environment, Development and Sustainability, 2006, 8(1): 19-53.
[29] Cheng C H, Chen T L, Wei L Y. A hybrid model based on rough sets theory and genetic algorithms for stock price forecasting (J). Inform Sciences, 2010, 180(9): 1610-29.
[30] Ballings M, Van Den Poel D, Hespeels N, et al. Evaluating multiple classifiers for stock price direction prediction (J). Expert Syst Appl, 2015, 42(20): 7046-56.
[31] Engle R F. Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United-Kingdom Inflation (J). Econometrica, 1982, 50(4): 987-1007.
[32] Bollerslev T. Generalized Autoregressive Conditional Heteroskedasticity (J). J Econometrics, 1986, 31(3): 307-27.
[33] George Box. Box and Jenkins: Time Series Analysis, Forecasting and Control (M)// A Very British Affair. Palgrave Macmillan UK, 2013.
[34] Ticknor J L. A Bayesian regularized artificial neural network for stock market forecasting (J). Expert Syst Appl, 2013, 40(14): 5501-6.
[35] Aamodt A, Plaza E. Case-based reasoning: Foundational issues, methodological variations, and system approaches (J). AI communications, 1994, 7(1): 39-59.
[36] Ahn H, Kim K-J. Bankruptcy prediction modeling with hybrid case-based reasoning and genetic algorithms approach (J). Applied Soft Computing, 2009, 9(2): 599-607.
[37] Yang B-S, Han T, Kim Y-S. Integration of ART-Kohonen neural network and case-based reasoning for intelligent fault diagnosis (J). Expert Syst Appl, 2004, 26(3): 387-95.
[38] Leigh W, Purvis R, Ragusa J M. Forecasting the NYSE composite index with technical analysis, pattern recognizer, neural network, and genetic algorithm: a case study in romantic decision support (J). Decision Support Systems, 2002, 32(4): 361-77.
[39] ST Phane N, Hector R. Effective retrieval and new indexing method for case based reasoning: application in chemical process design (J). Engineering Applications of Artificial Intelligence, 2010, 23(6): 880-94.
[40] Shin K-S, Han I. A case-based approach using inductive indexing for corporate bond rating (J). Decision Support Systems, 2001, 32(1): 41-52.
[41] Quinlan J R. Induction of decision trees (J). Machine Learning, 1986, 1(1):81-106.
[42] Breiman L I, Friedman J H, Olshen R A, et al. Classification and Regression Trees (CART) (J). Lecture Notes in Computer Science, 1984, 40(3):17–23.
[43] Using Stock Fundamental Analysis to Value a Company. Web hyperlink: http://www.investorguide.com/article/11632/valuation-methods-used-in-fundamental-analysis-of-stocks-igu/ . 2016.4
[44] Beddoe G, Petrovic S. Determining feature weights using a genetic algorithm in a case-based reasoning approach to personnel rostering (J). 2004.
[45] Jarmulak J, Craw S. Genetic algorithms for feature selection and weighting (J). Proceedings of the Ijcai’99 Workshop on Automating the Construction of Case Based Reasoners, 1999:28--33.
[46] Sohn S Y, Moon T H, Seok K J. Optimal pricing for mobile manufacturers in competitive market using genetic algorithm (J). Expert Systems with Applications, 2009, 36(2):3448-3453.
[47] Top 7 Technical Analysis Tools. Web hyperlink: http://www.investopedia.com/slide-show/tools-of-the-trade/ 2016.4