A Performance Analysis of Stochastic Processes and Machine Learning Algorithms in Stock Market Prediction

Abstract

In this study, we compare the performance of stochastic processes, namely, the Vasicek, Cox–Ingersoll–Ross (CIR), and geometric Brownian motion (GBM) models, with that of machine learning algorithms, such as Random Forest, Support Vector Machine (SVM), and k-Nearest Neighbors (KNN), for predicting the trends of stock indices XLF (financial sector), XLK (technology sector), and XLV (healthcare sector). The results showed that stochastic processes achieved remarkable prediction performance, especially the CIR model. Additionally, this study demonstrated that the metrics of machine learning algorithms are relatively lower. However, it is important to note that stochastic processes use the actual current index value to predict tomorrow’s value, which may overestimate their performance. In contrast, machine learning algorithms offer a more flexible approach and are not as dependent on the current index value. Therefore, optimizing the hyperparameters of machine learning algorithms is crucial for further improving their performance.