Feedforward networks in financial predictions: The future that modifies the present

The main goal of this paper is to show how relatively minor modifications of well-known algorithms (in particular, back propagation) can dramatically increase the performance of an artificial neural network (ANN) for time series prediction. We denote our proposed sets of modifications as the `self-momentum', `Freud' and `Jung' rules. In our opinion, they provide an example of an alternative approach to the design of learning strategies for ANNs, one that focuses on basic mathematical conceptualization rather than on formalism and demonstration. The complexity of actual prediction problems makes it necessary to experiment with modelling possibilities whose inherent mathematical properties are often not well understood yet. The problem of time series prediction in stock markets is a case in point. It is well known that asset price dynamics in financial markets are difficult to trace, let alone to predict with an operationally interesting degree of accuracy. We therefore take financial prediction as a meaningful test bed for the validation of our techniques. We discuss in some detail both the theoretical underpinnings of the technique and our case study about financial prediction, finding encouraging evidence that supports the theoretical and operational viability of our new ANN specifications. Ours is clearly only a preliminary step. Further developments of ANN architectures with more and more sophisticated `learning to learn' characteristics are now under study and test.