Finite mixture models for multiscale dynamics in Chinese financial markets

Abstract

A novel statistical machine learning technique for decomposing, analyzing, and modeling complex time series is presented in this paper. This methodology is based on unsupervised classification methods using finite mixtures, which have been widely used in factor analysis to extract essential information from multivariate static data in a parsimonious manner. Here, they are applied in a purely dynamic framework to create a new family of autoregressive models. The selection of the number of components and appropriate geometric template in these models is based on a set of information criteria that require solving a multiple objective optimization problem. To ensure the most adequate models are selected, the problem is augmented with a simulation instruction, providing a robust criterion for assignment. Experiments on real financial data sampled over the COVID-19 pandemic demonstrate the potential of this approach as a promising alternative to the well-known Box-Jenkins methodology. The proposed method offers flexibility, accuracy, and stability, making it suitable for a variety of applications in financial modeling and other fields where complex time series data analysis is required.