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http://dx.doi.org/10.5859/KAIS.2017.26.3.63

System Trading using Case-based Reasoning based on Absolute Similarity Threshold and Genetic Algorithm  

Han, Hyun-Woong (국민대학교 비즈니스IT전문대학원)
Ahn, Hyun-Chul (국민대학교 비즈니스IT전문대학원)
Publication Information
The Journal of Information Systems / v.26, no.3, 2017 , pp. 63-90 More about this Journal
Abstract
Purpose This study proposes a novel system trading model using case-based reasoning (CBR) based on absolute similarity threshold. The proposed model is designed to optimize the absolute similarity threshold, feature selection, and instance selection of CBR by using genetic algorithm (GA). With these mechanisms, it enables us to yield higher returns from stock market trading. Design/Methodology/Approach The proposed CBR model uses the absolute similarity threshold varying from 0 to 1, which serves as a criterion for selecting appropriate neighbors in the nearest neighbor (NN) algorithm. Since it determines the nearest neighbors on an absolute basis, it fails to select the appropriate neighbors from time to time. In system trading, it is interpreted as the signal of 'hold'. That is, the system trading model proposed in this study makes trading decisions such as 'buy' or 'sell' only if the model produces a clear signal for stock market prediction. Also, in order to improve the prediction accuracy and the rate of return, the proposed model adopts optimal feature selection and instance selection, which are known to be very effective in enhancing the performance of CBR. To validate the usefulness of the proposed model, we applied it to the index trading of KOSPI200 from 2009 to 2016. Findings Experimental results showed that the proposed model with optimal feature or instance selection could yield higher returns compared to the benchmark as well as the various comparison models (including logistic regression, multiple discriminant analysis, artificial neural network, support vector machine, and traditional CBR). In particular, the proposed model with optimal instance selection showed the best rate of return among all the models. This implies that the application of CBR with the absolute similarity threshold as well as the optimal instance selection may be effective in system trading from the perspective of returns.
Keywords
Case-based reasoning; Absolute similarity threshold; Feature selection; Instance selection; System trading; Genetic algorithm;
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Times Cited By KSCI : 5  (Citation Analysis)
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