PCA-ICA-LSTM: A Hybrid Deep Learning Model Based on Dimension Reduction Methods to Predict S&P 500 Index Price

Mehmet Sarıkoç () and Mete Celik
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Mehmet Sarıkoç: Erciyes University
Mete Celik: Erciyes University

Computational Economics, 2025, vol. 65, issue 4, No 17, 2249-2315

Abstract: Abstract In this paper, we propose a new hybrid model based on a deep learning network to predict the prices of financial assets. The study addresses two key limitations in existing research: (1) the lack of standardized datasets, time scales, and evaluation metrics, and (2) the focus on prediction return. The proposed model employs a two-stage preprocessing approach utilizing Principal Component Analysis (PCA) for dimensionality reduction and de-noising, followed by Independent Component Analysis (ICA) for feature extraction. A Long Short-Term Memory (LSTM) network with five layers is fed with this preprocessed data to predict the price of the next day using a 5 day time horizon. To ensure comparability with existing literature, experiments employ an 18 year dataset of the Standard & Poor's 500 (S&P500) index and include over 40 technical indicators. Performance evaluation encompasses six metrics, highlighting the model's superiority in accuracy and return rates. Comparative analyses demonstrate the superiority of the proposed PCA-ICA-LSTM model over single-stage statistical methods and other deep learning architectures, achieving notable improvements in evaluation metrics. Evaluation against previous studies using similar datasets corroborates the model's superior performance. Moreover, extensions to the study include adjustments to dataset parameters to account for the COVID-19 pandemic, resulting in improved return rates surpassing traditional trading strategies. PCA-ICA-LSTM achieves a 220% higher return compared to the “hold and wait” strategy in the extended S&P500 dataset, along with a 260% higher return than its closest competitor in the comparison. Furthermore, it outperformed other models in additional case studies. Graphical Abstract

Keywords: Financial time series; Price prediction; Principal component analysis (PCA); Independent component analysis (ICA); Deep learning; Long–short-term memory (LSTM) (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10614-024-10629-x

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