A Genetic Type-2 fuzzy logic based system for financial applications modelling and prediction

Abstract

Following the global economic crisis, many financial organisations around the World are seeking efficient frameworks for predicting and assessing financial risks. However, in the current economic situation, transparency became an important factor where there is a need to fully understand and analyse a given financial model. In this paper, we will present a Genetic Type-2 Fuzzy Logic System (FLS) for the modelling and prediction of financial applications. The proposed system is capable of generating summarized optimised type-2 FLSs based financial models which are easy to read and analyse by the lay user. The system is able to use the summarized model for prediction within financial applications. We have performed several evaluations in two distinctive financial domains one for the prediction of good/bad customers in a credit card approval application and the other domain was in the prediction of arbitrage opportunities in the stock markets. The proposed Genetic type-2 FLS has outperformed white box financial models like the Evolving Decision Rule (EDR) procedure (which is based on Genetic Programming (GP) and decision trees) and gave a comparable performance to black box models like neural networks while the proposed system provided a white box model which is easy to understand and analyse by the lay user.