Combining Autoregressive Integrated Moving Average Model and Gaussian Process Regression to Improve Stock Price Forecast

Abstract

Stock market performance is one key indicator of the economic condition of a country, and stock price forecasting is important for investments and financial risk management. However, the inherent nonlinearity and complexity in stock price movements imply that simple conventional modeling techniques are not adequate for stock price forecasting. In this paper, we present a hybrid model (ARIMA + GPRC) which combines the autoregressive integrated moving average (ARIMA) model and Gaussian process regression (GPR) with a combined covariance function (GPRC). The proposed hybrid model can account for both the linearity and nonlinearity in stock price movements. Based on daily data on three stocks listed on the Shanghai Stock Exchange (SSE), it is found that GPRC outperforms GPR with a single covariance function. Further, the proposed hybrid model is compared with the ARIMA model, artificial neural network (ANN), and GPRC model. Based on the forecasting trend and the statistical performance of the four models, the ARIMA + GPRC model is found to be the dominant model for stock price forecasting and can significantly improve forecasting performance.