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Computational Intelligence Final Project


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• Applied neural networks and genetic algorithms to track the Dow Jones Index
• Used historical data from January 2005 to March 2010 as training data sets
• Developed a portfolio that selected 5 best companies on a weekly basis

Published in: Business, Economy & Finance
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Computational Intelligence Final Project

  1. 1. Alex Camhi<br />Shankar Kar<br />Jason Siegel<br />Financial Market Analysis<br />
  2. 2. Agenda<br />Overview<br />DOW Jones Index<br />SP 500 Index<br />Data Collection <br />Objective Function <br />Results<br />DOW Jones Index<br />SP 500 Index<br />
  3. 3. Background Information<br />
  4. 4. Dow Jones<br />DOW Jones Index:<br />Referred to as “DOW 30”<br />Created by Wall Street Journal Editor – Charles DOW and statistician Edward Jones<br />Second oldest U.S market index<br />index that includes 30 large Blue Chip public owned companies in US that trades in the stock market <br />Index is price weighted ,<br />to compensate for effects of stock splits and adjustments – a scaled average.<br />Actual average is calculated by summing the 30 component stock prices and dividing it by a divisor <br />where p are the prices of the component stocks and d is the Dow Divisor.<br />Divisor is adjusted in case of stock splits or spinoff ( a company sells part of its company)<br />
  5. 5. Data Collection<br />Dow Jones Index:<br />Historical Data from January 1,2005 to March 24,2010<br />Obtained from Yahoo! finance website<br />Divisor value<br />Account for holidays and new companies added to the index. <br />Removed: C, AIG, MO, HON<br />Replaced with: BAC, CVX, CSCO, TRV<br />
  6. 6. S&P 500<br />S&P 500 Index:<br />500 Stock components on NYSE/Nasdaq<br />Owned and maintained by Standard & Poors<br />Components selected by committee<br />Must be commonly traded among general public<br />Representative of all major US industries<br />Float Weighted<br />Market capital of public shares vs. index<br />
  7. 7. Data Collection<br />S&P 500:<br />Historical data from Jan 2005 to April 2010<br />Source: Google Finance<br />Not split adjusted<br />Method of Collection<br />Script to collect historical prices<br />Data compiled and holidays added<br />
  8. 8. Genetic Algorithm Specifics<br />
  9. 9. Two GAs<br />Buy and Hold<br />Active Management<br />X number best stocks chosen<br />Stocks are held for the duration of the test<br />X number best stocks chosen each period<br />Y stocks swapped at start of each period<br />Data must be renormalized each time stocks are swapped<br />
  10. 10. Objective Function<br />Index data normalized<br />Selected stocks are weighted to total $1000 at start of period<br />RMSE – (ΣDifference in value^2)^1/2<br />
  11. 11. DJIA Tracking<br />
  12. 12. Purpose<br />Individual Investors consider investing in an index for many reasons<br />Tracker manages portfolio for individual investor<br />With advancements in the tracking technology, future market collapses could be seen in advance so that corrective action may be taken prior to the collapse. <br />
  13. 13. No Active Management<br />Running GA Script Stock 1<br />Parameters: (From Jan 1 2005 – Dec 31 2007)<br />Number of stocks to pick = 10<br />Number of generations = 1000<br />Population size = 30<br />Mutation rate = 0.1<br />Seed number = 2<br />
  14. 14. No Active Management<br />
  15. 15. Active Management<br />Running GA Script Stock 3<br />Parameters: (From Jan 1 2005 – Jan 28 2008)<br />Number of days to backtrack = 100<br />Number of swaps to make = 5<br />Number of Generations = 1000<br />Population size = 30<br />Mutation rate = 0.1<br />Seed number = 2<br />
  16. 16. Active Management<br />
  17. 17. Active Management<br />First Swap After 20 Days<br />Sold: AXP, XOM, JPM, KO, MCD<br />Bought: HON, DD, VZ, UTX, MRK<br />Added 20 rows of data representing monthly management through the data to 3/24/2010<br />Gave the program the option to swap 5 stocks each month<br />GA Optimizes the portfolio<br />Completed 30 iterations of this management process<br />
  18. 18. Final Results<br />
  19. 19. Final Results<br />
  20. 20. Final Results<br />
  21. 21. S&P500 Tracking<br />
  22. 22. GA Paramters<br />Portfolio Size: 20 Stocks<br />Replications: 3000<br />Population size: 30<br />Mutation Rate: 0.1<br />Number of Swaps: 5/Period<br />Back Data: 100 Days<br />Total time period: 28 months<br />
  23. 23. Buy and Hold<br />
  24. 24. Active Management<br />Period Length: 1 Month<br />Swap up to 5 stocks on the 1st of Month<br />GA run to optimize portfolio each period<br />Resulting portfolio values calculated and compared to S&P500 <br />
  25. 25. Active Management Results<br />
  26. 26. Active Management Results<br />Percent Error: 1.651%<br />
  27. 27. Questions?<br />