Mohammad Ghavami and Reza S. Dilmaghani
Equity Risk Premiums and Risk Free Rates in Modelling and Prediction of Financial Markets
231 - 234
2017
11
6
International Journal of Economics and Management Engineering
https://publications.waset.org/pdf/10007500
https://publications.waset.org/vol/126
World Academy of Science, Engineering and Technology
This paper presents an adaptive framework for
modelling financial markets using equity risk premiums, risk free
rates and volatilities. The recorded economic factors are initially
used to train four adaptive filters for a certain limited period of time
in the past. Once the systems are trained, the adjusted coefficients
are used for modelling and prediction of an important financial
market index. Two different approaches based on least mean squares
(LMS) and recursive least squares (RLS) algorithms are investigated.
Performance analysis of each method in terms of the mean squared
error (MSE) is presented and the results are discussed. Computer
simulations carried out using recorded data show MSEs of 4 and
3.4 for the next month prediction using LMS and RLS adaptive
algorithms, respectively. In terms of twelve months prediction, RLS
method shows a better tendency estimation compared to the LMS
algorithm.
Open Science Index 126, 2017