Prediction of Stock Market by Principal Component Analysis

Abstract

The categorization of high dimensional data present a fascinating challenge to machine learning models as frequent number of highly correlated dimensions or attributes can affect the accuracy of classification model. In this paper, the problem of high dimensionality of stock exchange is investigated to predict the market trends by applying the principal component analysis (PCA) with linear regression. PCA can help to improve the predictive performance of machine learning methods while reducing the redundancy among the data. Experiments are carried out on a high dimensional spectral of 3 stock exchanges such as: New York Stock Exchange, London Stock Exchange and Karachi Stock Exchange. The accuracy of linear regression classification model is compared before and after applying PCA. The experiments show that PCA can improve the performance of machine learning in general if and only if relative correlation among input features is investigated and careful selection is done while choosing principal components. Root mean square error (RMSE) is used as an evaluation metric to evaluate the classification model.