Stock market prediction using Hidden Markov Models

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Abstract

Stock market prediction is a classic problem which has been analyzed extensively using tools and techniques of Machine Learning. Interesting properties which make this modeling non-trivial is the time dependence, volatility and other similar complex dependencies of this problem. To incorporate these, Hidden Markov Models (HMM's) have recently been applied to forecast and predict the stock market. We present the Maximum a Posteriori HMM approach for forecasting stock values for the next day given historical data. In our approach, we consider the fractional change in Stock value and the intra-day high and low values of the stock to train the continuous HMM. This HMM is then used to make a Maximum a Posteriori decision over all the possible stock values for the next day. We test our approach on several stocks, and compare the performance to some of the existing methods using HMMs and Artificial Neural Networks using Mean Absolute Percentage Error (MAPE).

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