FINANCIAL FORECASTING MARKETS1 ANDREAS KARATHANASOPOULOS

FINANCIAL FORECASTING MARKETS2 “ Are we heading for a double dip? ”

FINANCIAL FORECASTING MARKETS3 Government Policy Quantitative Easing – Labour. Spending good money after bad? Wasteful… or essential for growth? - A strategy to increase demand and drive growth until the economy can function without any or little government intervention. Cuts to Public spending – Conservatives (David Cameron). - A strategy to cut back on wasteful and ‘unnecessary’ spending of tax payers money.

FINANCIAL FORECASTING MARKETS4 Fundamental Analysis Inflation - Increasing food prices as well as the general cost of living. Interest Rates - These have remained static at 0.5% and are possibly set to increase gradually in the foreseeable future. Unemployment – Increasing predominately in the public sector. Employment is however improving slightly in the private sector for new graduates and skilled workers. Sovereign debt – decreasing at a slow rate.

FINANCIAL FORECASTING MARKETS5 Technical Analysis It is essential for forecasting methodologies to capture the non-linear elements associated with today’s world. In this case we have decided to produce a forecasts using a variety of artificial intelligence. 1.) Neural Networks. 2.) Genetic Programming Algorithm. 3.) Gene Expression Programming. 4.) Support Vector Machine.

FINANCIAL FORECASTING MARKETS6 FTSE Source: Yahoo Finance (2010)

FINANCIAL FORECASTING MARKETS7 Data We study the FTSE 100 index of the English Exchange stock market from 1 January 2001 until 20 september 2011 (2556 trading days). Last year and half of 2009 is used as out of sample validation period. We select a set of 10 autoregressive terms and two moving averages series as inputs to our simple neural network models GEP, GP and SVM. We select another set of 5 indices (interest rate and inflation indices.

FINANCIAL FORECASTING MARKETS8 Benchmark Models Naïve Strategy (today’s return is the forecast for tomorrow’s). MACD (7-day moving average). ARMA (restricted [7,7] model).

FINANCIAL FORECASTING MARKETS9 How we Divide our Data? Name of periodTrading daysBeginningEnd Total data set25561 January September 2011 Training data set15861 January January 2007 Test data set48030 January September 2008 Out-of-sample data set [Validation set]49023 September September 2011  In terms of the trading strategy applied, we go (or stay) long when the forecast is positive and short when it is negative.

FINANCIAL FORECASTING MARKETS10 Transaction costs leverage and final trading performance out-of-sample NAIVEMACDARMAMLPRNN Information Ratio (excluding costs) Annualised Volatility (excluding costs) 36.70%40.03%38.13%40.28%40.21% Annualised Return (excluding costs) 11.42%18.51%7.68%24.30%23.75% Maximum Drawdown (excluding costs) %-53.16%-36.50%-38.32%-38.21% Leverage Factor Positions Taken (annualised) Transaction and leverage costs 15.47%4.94%9.36%13.65%19.11% Annualised Return (including costs) -4.05%13.57%-1.68%10.65%4.64%

Transaction costs leverage and final trading performance out-of-sample HONNGPGEPSVM %40.14%40.30%40.24% 28.30%34.57%32.50%37.71% %-62.24%-62.48%-62.46% %12.22%12.1%12.22% 15.56%12.35%20.4%24.89% FINANCIAL FORECASTING MARKETS11 Information Ratio (excluding costs) Annualised Volatility (excluding costs) Annualised Return (excluding costs) Maximum Drawdown (excluding costs) Leverage Factor Positions Taken (annualised) Transaction and leverage costs Annualised Return (including costs)

FINANCIAL FORECASTING MARKETS ? The SVM has the highest performance before transaction costs and with more refined trading strategies the SVM perform and get better. The GEP and the GP Algorithms do remarkably well and take the second and the fourth position. It’s worth noticing the excellent performance of Higher Order Neural Network. The final prediction can give us a positive return in the one day ahead forecast in the out-of-sample period of 2011 and half 2010.

FINANCIAL FORECASTING MARKETS13 Concluding Remarks From a combination of fundamental and technical analysis it is clear that the current government has a huge challenge ahead. In summary: - Fundamental analysis reveals that there are tough times ahead however I believe that sustain GDP growth is possible even in the presence of deep spending cuts. Wastefulness is never productive nor is it effective. - Technical analysis has also provided evidence that a ‘double dip’ recession is not anticipated.

FINANCIAL FORECASTING MARKETS14 Thank you!!!!