Economic-mathematical model for predicting financial market dynamics

Abstract

Study purpose.Existing approaches to forecasting dynamics of financial markets, as a rule, reduce to econometric calculations or technical analysis techniques, which in turn is a consequence of preferences among specialists, engaged in theoretical research and professional market participants, respectively. The main study purpose is developing a predictive economic-mathematical model that allows combining both approaches. In other words, this model should be estimated using traditional methods of econometrics and, at the same time, take into account the impact on the pricing process of the effect of clustering participants on behavioral patterns, as the basis of technical analysis. In addition, it is necessary that the created economic-mathematical model should take into account the phenomenon of existing historical trading levels and control the influence they exert on price dynamics, when it falls into local areas of these levels. Such analysis of price behavior patterns in certain areas of historical repeating levels is a popular approach among professional market participants. Besides, an important criterion of developing model’s potential applicability by a wide range of the interested specialists is its general functional form’s simplicity and, in particular, its components.Materials and methods. In the study, the market of the pound sterling exchange rate against the US dollar (GBP/USD) for the whole period of 2017 was chosen as the considered financial series, in order to forecast it. The presented economic-mathematical model was estimated by classical Kalman filter with an embedded neural network. The choice of these assessment tools can be explained by their wide capabilities in dealing with non-stationary, noisy financial market time series. In addition, applying Kalman filter is a popular technique for estimation local-level models, which principle was implemented in the newly model, proposed in article.Results. Using chosen approach of simultaneous applying Kalman filter and artificial neural network, there were obtained statistically significant estimations of all model’s coefficients. The subsequent model application on GBP/USD series from the test dataset allowed demonstrating its high predictive ability comparing with added random walk model, in particular judging by percentage of correct forecast directions. All received results have confirmed that constructed model allows effectively taking into account structural features of considered market and building good forecasts of future price dynamics.Conclusion. The study was focused on developing and improving apparatus of forecasting financial market prices dynamics. In turn, economic-mathematical model presented in that paper can be used both by specialists, carrying out theoretical studies of pricing process in financial markets, and by professional market participants, forecasting the direction of future price movements. High percentage of correct forecast directions makes it possible to use proposed model independently or as a confirmatory tool.