Application of VPRS model with enhanced threshold parameter selection mechanism to automatic stock market forecasting and portfolio selection

This study proposes a technique based upon Fuzzy C-Means (FCM) classification theory and related fuzzy theories for choosing an appropriate value of the Variable Precision Rough Set (VPRS) threshold parameter (beta) when applied to the classification of continuous information systems. The VPRS model is then combined with a moving Average Autoregressive Exogenous (ARX) prediction model and Grey Systems theory to create an automatic stock market forecasting and portfolio selection mechanism. In the proposed mechanism, financial data are collected automatically every quarter and are input to an ARX prediction model to forecast the future trends of the collected data over the next quarter or half-year period. The forecast data are then reduced using a GM(1,N) model,classified using a FCM clustering algorithm, and then supplied to a VPRS classification module which selects appropriate investment stocks in accordance with a pre-determined set of decision-making rules. Finally, a grey relational analysis technique is employed to weight the selected stocks in such a way as to maximize the rate of return of the stock portfolio. The validity of the proposed approach is demonstrated using electronic stock data extracted from the financial database maintained by the Taiwan Economic journal (TEJ). The portfolio results obtained using the proposed hybrid model are compared with those obtained using a Rough Set (RS) selection model. The effects of the number of attributes of the RS lower approximation set and VPRS beta-lower approximation set on the classification are systematically examined and compared. Overall, the results show that the proposed stock forecasting and stock selection mechanism not only yields a greater number of selected stocks in the beta-lower approximation set than in the RS approximation set, but also yields a greater rate of return. (C) 2009 Elsevier Ltd. All rights reserved.