\r\nmodelling financial markets using equity risk premiums, risk free

\r\nrates and volatilities. The recorded economic factors are initially

\r\nused to train four adaptive filters for a certain limited period of time

\r\nin the past. Once the systems are trained, the adjusted coefficients

\r\nare used for modelling and prediction of an important financial

\r\nmarket index. Two different approaches based on least mean squares

\r\n(LMS) and recursive least squares (RLS) algorithms are investigated.

\r\nPerformance analysis of each method in terms of the mean squared

\r\nerror (MSE) is presented and the results are discussed. Computer

\r\nsimulations carried out using recorded data show MSEs of 4% and

\r\n3.4% for the next month prediction using LMS and RLS adaptive

\r\nalgorithms, respectively. In terms of twelve months prediction, RLS

\r\nmethod shows a better tendency estimation compared to the LMS

\r\nalgorithm.","references":"[1] X. Zheng and B. Chen, \u201cModelling and analysis of financial markets\r\nusing system adaptation and frequency domain approach,\u201d at the IEEE\r\nInt. Conf. Control and Automation, Christchurch, New Zealand, 2009, pp.\r\n1068-1073.\r\n[2] E. Andersson, \u201cTurning point detection using non-parametric statistical\r\nsurveillance: Influence of some turning point characteristics,\u201d at the Int.\r\nWorkshop on Intelligent Statistical Quality Control, Warsaw, Poland, 2004.\r\n[3] K. Adam, J. Beutel and A. Marcet \u201cStock price booms and expected\r\ncapital gains,\u201d CEPR Discussion Paper No.9988, 2014.\r\n[4] K. Adam and A. Marcet, \u201cInternal Rationality, Imperfect Market\r\nKnowledge and Asset Prices,\u201d Journal of Economic Theory, vol. 146, pp.\r\n1224-1252, 2014.\r\n[5] J. Wesen, V. Vermehren and H. M. de Oliveira, \u201cAdaptive Filter Design\r\nfor Stock Market Prediction Using a Correlation-based Criterion,\u201d arXiv\r\npreprint arXiv:1501.07504, 2015.\r\n[6] M. Labonte, \u201cMonetary Policy and the Federal Reserve: Current Policy\r\nand Conditions,\u201d US Congressional Research Service, Jan 2016.\r\n[7] The ECB\u2019s forward guidance, 2015.\r\n[8] A. Damodaran, \u201cEquity Risk Premiums (ERP): Determinants, Estimation\r\nand Implications,\u201d New York University, Stern Business School, 2012.\r\n[9] L. Booth, \u201cEstimating the Equity Risk Premium and Equity Costs: New\r\nWay of Looking at Old Data,\u201d Journal of Applied Corporate Finance,\r\nv12(1), pp. 100-112, 1999.\r\n[10] CBOE, \u201cThe COBE Volatility Index VIX\u201d, white-paper, available at\r\nCBOE website.\r\n[11] B. Widrow and S. D. Stearns. Adaptive Signal Processing, Prentice-Hall,\r\nEnglewood Cliffs, N.J., 1985.","publisher":"World Academy of Science, Engineering and Technology","index":"Open Science Index 126, 2017"}