Analysis of Financial Time Sequence using Hidden Markov Models

Financial time sequence analysis has been a popular research topic in the field of finance, data science and machine learning. It is a highly challenging due to the extreme complexity within the sequences. Mostly existing models are failed to capture its intrinsic information, factor and tendency. To improve the previous approaches, in this paper, we propose a Hidden Markov Model (HMMs) based approach to analyze the financial time sequence. The fluctuation of financial time sequence was predicted through introducing a dual-state HMMs. Dual-state HMMs models the sequence and produces the features which will be delivered to SVMs for prediction. Note that we cast a financial time sequence prediction problem to a classification problem. To evaluate the proposed approach, we use Shanghai Composite Index as the dataset for empirically experiments. The dataset was collected from 550 consecutive trading days, and is randomly split to the training set and test set. The extensively experimental results show that: when analyzing financial time sequence, the mean-square error calculated with HMMs was obviously smaller error than the compared GARCH approach. Therefore, when using HMM to predict the fluctuation of financial time sequence, it achieves higher accuracy and exhibits several attractive advantageous over GARCH approach.