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Classification of intraday S&P500 returns with a Random Forest

Christoph Lohrmann and Pasi Luukka

International Journal of Forecasting, 2019, vol. 35, issue 1, 390-407

Abstract: Stock markets can be interpreted to a certain extent as prediction markets, since they can incorporate and represent the different opinions of investors who disagree on the implications of the available information on past and expected events and trade on their beliefs in order to achieve profits. Many forecast models have been developed for predicting the future state of stock markets, with the aim of using this knowledge in a trading strategy. This paper interprets the classification of the S&P500 open-to-close returns as a four-class problem. We compare four trading strategies based on a random forest classifier to a buy-and-hold strategy. The results show that predicting the classes with higher absolute returns, ‘strong positive’ and ‘strong negative’, contributed the most to the trading strategies on average. This finding can help shed light on the way in which using additional event outcomes for the classification beyond a simple upward or downward movement can potentially improve a trading strategy.

Keywords: Financial markets; Machine learning; Forecasting; Trading strategy; Feature selection (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:35:y:2019:i:1:p:390-407

DOI: 10.1016/j.ijforecast.2018.08.004

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