A Hybrid Relational Approach Toward Stock Price Prediction and Profitability

Abstract

An accurate estimation of future stock prices can help investors maximize their profits. The current advancements in the area of artificial intelligence (AI) have proven prevalent in the financial sector. Besides, stock market prediction is difficult owing to the considerable volatility and unpredictability induced by numerous factors. Recent approaches have considered fundamental, technical, or macroeconomic variables to find hidden complex patterns in financial data. At the macro level, there exists a spillover effect between stock pairs that can explain the variance present in the data and boost the prediction performance. To address this interconnectedness defined by intrasector stocks, we propose a hybrid relational approach to predict the future price of stocks in the American, Indian, and Korean economies. We collected market data of large-, mid-, and small-capitalization peer companies in the same industry as the target firm, considering them as relational features. To ensure efficient feature selection, we have utilized a data-driven approach, i.e., random forest feature permutation (RF2P), to remove noise and instability. A hybrid prediction module consisting of temporal convolution and linear model (TCLM) is proposed that considers irregularities and linear trend components of the financial data. We found that RF2P-TCLM gave the superior performance. To demonstrate the real-world applicability of our approach in terms of profitability, we created a trading method based on the predicted results. This technique generates a higher profit than the existing approaches.