IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v542y2020ics0378437119318655.html
   My bibliography  Save this article

Neural network forecasting in prediction Sharpe ratio: Evidence from EU debt market

Author

Listed:
  • Vukovic, Darko
  • Vyklyuk, Yaroslav
  • Matsiuk, Natalia
  • Maiti, Moinak

Abstract

This study analyzes a neural networks model that forecast Sharpe ratio. The developed neural networks model is successful to predict the position of the investor who will be rewarded with extra risk premium on debt securities for the same level of portfolio risk or a greater risk premium than proportionate growth risk. The main purpose of the study is to predict highest Sharpe ratio in the future. Study grouped the data on yields of debt instruments in periods before, during and after world crisis. Results shows that neural networks is successful in forecasting nonlinear time lag series with accuracy of 82% on test cases for the prediction of Sharpe-ratio dynamics in future and investor‘s portfolio position.

Suggested Citation

  • Vukovic, Darko & Vyklyuk, Yaroslav & Matsiuk, Natalia & Maiti, Moinak, 2020. "Neural network forecasting in prediction Sharpe ratio: Evidence from EU debt market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 542(C).
    • Handle: RePEc:eee:phsmap:v:542:y:2020:i:c:s0378437119318655
    DOI: 10.1016/j.physa.2019.123331
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437119318655
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2019.123331?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kon, Stanley J, 1984. "Models of Stock Returns-A Comparison," Journal of Finance, American Finance Association, vol. 39(1), pages 147-165, March.
    2. Dirk Paulsen & Jakob Sohl, 2016. "Noise Fit, Estimation Error and a Sharpe Information Criterion," Papers 1602.06186, arXiv.org, revised Dec 2019.
    3. Darko Vukovic & Vladislav Ugolnikov & Moinak Maiti, 2020. "Analyst says a lot, but should you listen? Evidence from Russia," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 47(4), pages 729-745, March.
    4. K. Borch, 1969. "A Note on Uncertainty and Indifference Curves," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(1), pages 1-4.
    5. Eugene F. Fama, 1965. "Portfolio Analysis in a Stable Paretian Market," Management Science, INFORMS, vol. 11(3), pages 404-419, January.
    6. Samuelson, Paul A., 1967. "General Proof that Diversification Pays*," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(1), pages 1-13, March.
    7. Vukovic, Darko & Lapshina, Kseniya A. & Maiti, Moinak, 2019. "European Monetary Union bond market dynamics: Pre & post crisis," Research in International Business and Finance, Elsevier, vol. 50(C), pages 369-380.
    8. Darko B. Vukovic & Victor Prosin, 2018. "The prospective low risk hedge fund capital allocation line model: evidence from the debt market," Oeconomia Copernicana, Institute of Economic Research, vol. 9(3), pages 419-439, September.
    9. Fong, Tom Pak Wing & Wu, Shui Tang, 2020. "Predictability in sovereign bond returns using technical trading rules: Do developed and emerging markets differ?," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    10. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    11. Eakins, Stanley G. & Stansell, Stanley R., 2003. "Can value-based stock selection criteria yield superior risk-adjusted returns: an application of neural networks," International Review of Financial Analysis, Elsevier, vol. 12(1), pages 83-97.
    12. Pao Lun Cheng, 1962. "Optimum Bond Portfolio Selections," Management Science, INFORMS, vol. 8(4), pages 490-499, July.
    13. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    14. Korn, Olaf & Koziol, Christian, 2006. "Bond portfolio optimization: A risk-return approach," CFR Working Papers 06-03, University of Cologne, Centre for Financial Research (CFR).
    15. Roll, Richard, 1971. "Investment Diversification and Bond Maturity," Journal of Finance, American Finance Association, vol. 26(1), pages 51-66, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Vukovic, Darko B. & Lapshina, Kseniya A. & Maiti, Moinak, 2021. "Wavelet coherence analysis of returns, volatility and interdependence of the US and the EU money markets: Pre & post crisis," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    2. Park, Hyun Joon & Francisco, Sara Chari & Pang, M. Rosemary & Peng, Lulu & Chi, Guangqing, 2023. "Exposure to anti-Black Lives Matter movement and obesity of the Black population," Social Science & Medicine, Elsevier, vol. 316(C).
    3. Darko Vukovic & Moinak Maiti & Zoran Grubisic & Elena M. Grigorieva & Michael Frömmel, 2021. "COVID-19 Pandemic: Is the Crypto Market a Safe Haven? The Impact of the First Wave," Sustainability, MDPI, vol. 13(15), pages 1-17, July.
    4. Darko B. Vukovic & Carlos J. Rincon & Moinak Maiti, 2021. "Price distortions and municipal bonds premiums: evidence from Switzerland," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-21, December.
    5. Darko B. Vukovic & Vladislav Ugolnikov & Moinak Maiti, 2021. "Sell‐side analysts' recommendations a value or noise," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 3134-3151, April.
    6. Moinak Maiti & Darko Vukovic & Yaroslav Vyklyuk & Zoran Grubisic, 2022. "BRICS Capital Markets Co-Movement Analysis and Forecasting," Risks, MDPI, vol. 10(5), pages 1-13, April.
    7. Li-Chen Cheng & Yu-Hsiang Huang & Ming-Hua Hsieh & Mu-En Wu, 2021. "A Novel Trading Strategy Framework Based on Reinforcement Deep Learning for Financial Market Predictions," Mathematics, MDPI, vol. 9(23), pages 1-16, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David S. Jones & V. Vance Roley, 1981. "Bliss Points in Mean-Variance Portfolio Models," NBER Technical Working Papers 0019, National Bureau of Economic Research, Inc.
    2. Miller, Matthew Edward, 2003. "An economic perspective on Iowa farm diversification in the twentieth century," ISU General Staff Papers 2003010108000018194, Iowa State University, Department of Economics.
    3. Arturo Lorenzo Valdés & Antonio Ruiz Porras, 2014. "Un modelo Tgarch con una distribución t de student asimétrica y las hipótesis de racionalidad de los inversionistas bursátiles en Latinoamérica," Archivos Revista Economía y Política., Facultad de Ciencias Económicas y Administrativas, Universidad de Cuenca., vol. 19, pages 66-97, Enero.
    4. Qu, Xiangyu, 2017. "Subjective mean–variance preferences without expected utility," Mathematical Social Sciences, Elsevier, vol. 87(C), pages 31-39.
    5. Fatma Lajeri-Chaherli, 2016. "On The Concavity And Quasiconcavity Properties Of ( Σ , Μ ) Utility Functions," Bulletin of Economic Research, Wiley Blackwell, vol. 68(3), pages 287-296, April.
    6. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2010. "Market Efficiency of Oil Spot and Futures: A Stochastic Dominance Approach," CIRJE F-Series CIRJE-F-705, CIRJE, Faculty of Economics, University of Tokyo.
    7. Nicolas Brisset, 2018. "Models as speech acts: the telling case of financial models," Journal of Economic Methodology, Taylor & Francis Journals, vol. 25(1), pages 21-41, January.
    8. Merton, Robert, 1990. "Capital market theory and the pricing of financial securities," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 11, pages 497-581, Elsevier.
    9. Lean, Hooi Hooi & McAleer, Michael & Wong, Wing-Keung, 2010. "Market efficiency of oil spot and futures: A mean-variance and stochastic dominance approach," Energy Economics, Elsevier, vol. 32(5), pages 979-986, September.
    10. A. El-Gamal, Mahmoud, 2001. "An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 8, pages 29-58.
    11. Phoebe Koundouri & Nikolaos Kourogenis & Nikitas Pittis, "undated". "Statistical Modeling of Stock Returns: Explanatory or Descriptive? A Historical Survey with Some Methodological Reflections," DEOS Working Papers 1331, Athens University of Economics and Business.
    12. Merton, Robert C., 1993. "On the microeconomic theory of investment under uncertainty," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 13, pages 601-669, Elsevier.
    13. Khan, M. Ali, 2000. "Globalization Of Financial Markets And Islamic Financial Institutions," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 8, pages 20-66.
    14. Gilles Boevi Koumou, 2020. "Diversification and portfolio theory: a review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 267-312, September.
    15. Yi-Cheng Shih & Sheng-Syan Chen & Cheng-Few Lee & Po-Jung Chen, 2014. "The evolution of capital asset pricing models," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 415-448, April.
    16. Benjamin M. Friedman & V. Vance Roley, 1985. "Aspects of Investor Behavior Under Risk," NBER Working Papers 1611, National Bureau of Economic Research, Inc.
    17. Ballestero, E. & Gunther, M. & Pla-Santamaria, D. & Stummer, C., 2007. "Portfolio selection under strict uncertainty: A multi-criteria methodology and its application to the Frankfurt and Vienna Stock Exchanges," European Journal of Operational Research, Elsevier, vol. 181(3), pages 1476-1487, September.
    18. José Antonio Climent Hernández & Gabino Sánchez Arzate & Ambrosio Ortiz Ramírez, 2021. "Portafolios ?-estables del G20: Evidencia empírica con Markowitz, Tobin y CAPM," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(4), pages 1-28, Octubre -.
    19. Christian Walter, 2005. "La gestion indicielle et la théorie des moyennes," Revue d'Économie Financière, Programme National Persée, vol. 79(2), pages 113-136.
    20. Liu, Liping, 2004. "A new foundation for the mean-variance analysis," European Journal of Operational Research, Elsevier, vol. 158(1), pages 229-242, October.

    More about this item

    Keywords

    Risk; Returns; Neural networks; Sharpe ratio;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:542:y:2020:i:c:s0378437119318655. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.