Volatility model based on multi-stock index for TAIEX forecasting

Abstract

Conventional time series models have been applied to handle many forecasting problems, such as financial, economic and weather forecasting. In stock markets, correct stock predictions will bring a huge profit for stock investors. However, conventional time series models produce forecasts based on some strict statistical assumptions about data distributions, and, therefore, they are not very proper to forecast financial datasets. This paper proposes a new forecasting model using adaptive learning techniques to predict TAIEX (Taiwan Stock Exchange Capitalization Weighted Stock index) with multi-stock indexes (NASDAQ stock index and Dow Jones stock index). In verification, this paper employs seven year period of TAIEX stock index, from 1997 to 2003, as experimental datasets, and the root mean square error (RMSE) as evaluation criterion. The performance comparison results show that the proposed model outperforms the listing methods in forecasting Taiwan stock market. Besides, from statistical test results, it is showed that the volatility of Dow Jones and the NASDAQ affect TAIEX significantly.