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Optimal Weight Selection of ANN to Predict

the Price of the General Index for Amman
Stock Exchange
K. Eghnam, A. Sheta, S. Bani-Ahmad

Abstract— Artificial neural networks (ANNs) have been successfully used to solve variety of problem in prediction, recognition, pat-
tern classification, modeling and simulation of dynamic systems. Unfortunately, it was reported that the optimization of the ANN weights
represents a challenge. The reason is traditional ANN learning algorithms such as the back propagation algorithm can stuck by local
minimum. There is no guarantee that the produced weights are the optimal set to solve the problem under study. Genetic Algorithms
(GAs) were able to provide solutions for diversity of parameter optimization problems. In this study, we encoded the ANN weights as
parameters (i.e. chromosome) for GAs to optimize. This simple idea significantly helps in solving a challenge problem in stock ex-
change. A financial data set for Banks Participation, Insurance Participation, Service Participation, and Industry Participation for the pe-
riod 1992-2005 was collected from Amman Stock Exchange (ASE). This data set was used as a training data set for the proposed
ANNs-GAs model. The developed results show that the proposed model out-performs the traditional Multiple Linear Regression model
(MLR) with 4.95%. The experimental results are promising.

Index Terms— Prediction, Neural Networks, Genetic Algorithms, Stock Market, Amman Stock Exchange.

——————————  ——————————

1 INTRODUCTION

T HE ability to predict the direction of the stock market

is very important factor when investing in the finan-
cial market [1]. There are several motivations to ex-
plore the stock market prediction problem. Academic
researchers and business practitioners and many others
have developed many types of prediction methods and
techniques in an attempt to find a reliable and effective
solution of the stock market exchange. Detecting trends of
stock data helps decision maker to take the correct action
to increase the profit [3]. No one technique or combina-
tion of techniques has been successful enough to beat the
market [2].
In recent years, the concept of Soft-Computing tech-
niques has provided a good tool to model time series [3].
Artificial neural network (ANNs) proved to be one of the
most effective Soft-Computing techniques. Mainly, its
ability to discover nonlinear relationship and irregulari-
ties in input data makes them ideal for predicting the
stock market [4].
Empirical results have shown that ANNs outperforms
regression model [5, 6, and 7]. There are many major
problems associated with using ANN in the prediction of
the stock market index. They include the determination of
the ANN size, the selection of the best weights of the
————————————————
 K. Eghnam is with the Information Technology Department , Al-Balqa
Applied University, Salt, Jordan.
 A. Sheta is with The World Islamic Sciences and Education University
(WISE), Amman, Jordan.
 S. Bani-Ahmad is with the Information Technology Department, Al-Balqa
Applied University.
Network and the selection of the initial weights to start
the weight adjustment process. It was found the GAs has
the applicability to solve these types of problems. GAs is
practically good at efficiently searching large and com-
plex spaces to find nearly global optima. As the complexi-
ty of the search space increase, GA presents an attractive
alternative to traditional learning techniques such as
back-propagation. Even better, GA are good complement
to gradient-based techniques for complex search space. In
[12], the authors were proposed and implemented a fu-
sion model by combining the Hidden Markov Model
(HMM), ANN and GA to forecast financial market beha-
vior. In [13; 14], ANNs were used to predict the stock
prices.
The objective of this research is to explore the use of
Genetic Algorithms (GAs) to train a feed-forward ANN,
to find the near optimal weights, to predict the price of
the general index for Amman stock exchange (ASE). We
plan also to compare our results against the multiple li-
near regression (MLR) models. The proposed prediction
model will be used to test the ability of GAs to find the
optimal set of weights for ANN.
1.1 Amman Stock Exchange (ASE)
ASE was established in March 1999 as a non-profit in-
stitution with administrative and financial autonomy [16].
It is authorized to function as an exchange for the trading
of securities. The exchange is governed by a seven-
member board of directors. A chief executive officer over-
sees day-to-day responsibilities and reports to the board.
The un-weighted index is supplemented by sub-indices
for the four sectors (see table 1); Banks Participation, In-
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y  0  1 x1  2 x2  ...  4 x4   (1)
where:

y is the price of the general index for ASE,

 x1 is the Banks Participation,
 x 2 is the Insurance participation,
 x3 is the Service Participation,
 x 4 is the Industry participation,
  0 is the intercept of the regression equation,
  i is the regression coefficients, i  1,2,3,4, and
Fig. 1. The proposed ANN
  is independent N (0,  ) .
2

We may write the sample regression model cor-

surance Participation, Service Participation, and Industry responding to Eq. 2.
Participation. The base was changed to 1000 as of January 5
1st 2004. y  0  
j 1
j x ij   i (2)
TABLE 1
SNAPSHOT OF THE INPUT DATA: AMMAN STOCK EXCHANGE 2. ARTIFICIAL NEURAL NETWORK MODEL
INDEX PRICE , JANUARY 2004
In the following we will define main elements of ANN
Day Bank Insurance Security Industry Index Price architecture with three layers. The ANN has an n in-
1 4515.7 2299.1 1308.6 1507.4 2668.2 put nodes, single output node and p hidden units
2 4565.4 2301.8 1300.3 1504.6 2680.5 (nodes). The neural network input consists of a set of
3 4592.6 2317.8 1319.3 1530.8 2708.3 financial inputs factors x  {x1 , x 2 ,........., x n } , where
4 4592.6 2317.8 1319.3 1530.8 2708.3 n is the financial vector inputs. Each sample xi in set
5 4781.2 2348.1 1396.3 1575.4 2818.3 x is an m-dimensional financial vector inputs. A one-
6 4876.6 2373.4 1440.9 1623.4 2887.3 dimensional actual output vec-
7 4816.4 2381.5 1411.8 1617.9 2854.8 tor y  { y1 , y 2 ,........., y p } , where p is equal to the
8 4774.6 2439.8 1409.9 1605.2 2835.5 number of hidden layer units. whi , is n  p matrix of
9 4736 2483.3 1378.4 1608.5 2813.8 synaptic weights connecting the inputs and hidden
10 4659.4 2509.1 1397.1 1630.8 2805 layers and woh , is P  1 matrix of synaptic weights
11 4696.8 2522.6 1399 1655.1 2829.1 connecting the hidden and^ output layers, and for sim-
12 4707.1 2552.5 1405.5 1637.2 2826.9 plicity. We assume that y is the desired response of
13 4657.5 2517 1366.3 1616 2787.2 the ANN. The ANN is shown in Figure 1.
14 4600.8 2502.9 1331.5 1581.8 2740.7
15 4628.9 2475.9 1368.8 1588.3 2765.6 Back-propagation is commonly used to train ANN for
16 4630.4 2508.8 1378.2 1597.7 2774 many cases [3]. Classical back-propagation adopts
17 4649.8 2541.8 1371.9 1584.3 2772.9 first-order steepest descent technique as a learning al-
18 4719.5 2531.5 1390.7 1601 2809.9 gorithm. Weights are modified in a direction that cor-
19 4732.9 2494.2 1384.6 1601.7 2812.1 responds to the negative gradient of the error surface.
20 4756.9 2499.4 1389.4 1602 2822 Gradient is an extremely local pointer and does not
21 4836.3 2513.5 1404.4 1622.9 2863.2 point to global minimum [9]. Newton-based algo-
rithms often converge faster than gradient method.
1.2 Models to Predict Stock Exchange Unfortunately; it is complex and expensive to com-
In the following sections, we will provide three models pute. The Levemburge-Marquardt learning algorithm
used to predict the price of the stock exchange. They are is considered to be the fastest method for training
1) Multiple Linear Regression model 2) Neural Network moderate-sized back-propagation neural networks but
model and 3) ANN tuned GAs model. We will formulate it has a drawback since it requires the storage of some
each case to suitably fit to the ASE matrix that can be quite large for certain problems [3;
7]. If the network is very large then we may run out of
1.3 Multiple Linear Regression Model memory.
Regression analysis is one of the most widely used
techniques for analyzing multifactor data. This is because ANN Tuned GAs Model
of its ability to assess which factors to include and which To use GAs to solve the above described problem. We
to exclude, in order to develop alternate models with dif- need to follow the following steps. They are:
ferent factors. In this method, the multiple regression
models can be presented as follows:
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  START  Tuning Parameters for GAs

Start the evolutionary process by selection, crossover,
Initialize Network 
and mutation operation by GA. The best individuals
survive to the next generation.
Termination Criteria
Finally, the evolution terminates when the generation
Is termination  Yes  number reached it maximum value or the optimal
criteria  Stop GA  values are reached. To summarize the evolution
satisfied?  Training  process of GAs in selecting the best set of weights of
an ANN for solving the stock market prediction prob-
END lem we followed the procedure give in Figure 3.
No 
3. EXPERIMENTS AND DISCUSSION
GA Training 
A fully connected feed foreword ANN was used
with input, single hidden and output layers. Each
Weight Prediction  layer consists of nodes, which are either inputs data,
of Neural Network   connection points where summation of data occurs, or
output data. Specifically, to take an extreme case a
single hidden layer comprising N units (nodes). A
Fig. 3. Framework of combining GAs and ANNs.
population of weight set is initiated randomly (uni-
form distributed in the interval [-1, 1]).
We run GA for 50 generations to obtain the optimal
Representation set of weights. GA with various tuning parameters,
The first phase is to decide the representation of population size, crossover and mutation probabilities,
weights. A floating point representation of connection were used. In Table 2, we show the computed VAF for
weights will be used in our case to represent the ANN various population sizes.
weights. Thus, the chromosome representation can be
given in Figure 2. TABLE 2
COMPUTED VAF WITH VARIOUS POPULATION SIZE
1 2  n*p  (n*p)+1  (n*p)+2  (n*p)+p
Population size VAF
50 99.971
Fig. 2. A Chromosome representation 100 99.9642
Fitness Function Selection 200 99.9342
Secondly, evaluate the fitness of these connection
The experimental results show that it is possible to
weights (chromosome) by computing its fitness using
model the stock price based on historical trading data
the mean square error (MSE) function as given in equ-
by using a three layer neural networks. The ANN-GA
ation 3.
model was able to model 400 days of trading for Am-
1 n  

MSE   
n k 1 
y ( k )  y ( k)

(3)
man stock exchange with a high VAF. The model was
able to predict the price of the index as of January
2004. The price of general index for Amman stock ex-
The fitness of an individual is determined by the total
change is well predicted by the model with high de-
MSE. The higher the error is the lower the fitness. y is
gree of variance-Account-for (VAF=99%).
the actual neurons output for the inputs training sam-
ples at the output layer, while y as its desired re-
In order to get a deeper understanding of the results
sponse. For empirical test, Equation 4 is the modified
we made some statistical analysis. The ANN-GA mod-
fitness function.
el was tested with various numbers of nodes in the
hidden layer. For example, it was tested for 4, 8, 12 and
fitness  e  MSE (4)
16 nodes, and they where tested respectively (see Table
3). These tests were considered as an indication to the
In order to evaluate the performance of our model
success of the developed model in providing outstand-
against the MLR model, the variance-Account-for
ing results in our case.
(VAF) was chosen as given in Equation 3.
 The ANN-GA model achieved a high variance-
V A F  1  var( y  y ) / var( y ) (5)
Account-for up to 99% when the hidden layer has 8
nodes (see Figure 4). In order to improve the perfor-
mance of the model we explored the increase of the
population size of the GAs. We found that the perfor-
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Fig. 4a. Prediction of the general ASE using the MLR model
Fig. 4b. Prediction of the general ASE using the NN-GA model.
mance was static and the model hasn’t recorded an
improvement (see Table 2). The ANN model also pro-
vides a better fit with observation than MLR model
(See Figure 4a and 4b). It performed 4.95% better than
the MLR model.
Preliminary research results proved that the hybrid
model has a better overall accuracy than MLR model.
We thought the following two main reasons are en-
hance the hybrid model results:
(1) The use of ANNs which are the most effective
technique in financial problem. Mainly, its ability
to discover nonlinear relationship and irregulari-
ties in input data makes them ideal for predicting
the stock problems market.
(2) The use of GA was a major reason to overcome the
problem of shortage data availability. To avoid
over-training, the number of hidden nodes was li-
mited to 8 and the number of generations was kept
at 500.
67
(3) Using the GA procedures over many generations,
increasingly better solutions to the problem will
emerge.
TABLE 3
HYBRID MODEL PERFORMANCE USING VARIOUS NUMBERS OF
NODES WITH MULTI RUNS
N 4 8 12 16
VAF 99.653 98.765 99.484 96.406
99.213 99.316 96.415 99.127
98.437 99.971* 98.200 94.101
97.841 96.327 97.866 95.674
4. CONCLUSIONS AND FUTURE WORK
In this paper, we developed ANNs-GAs based model
for the prediction of Amman Stock Exchange. The
model has been successfully used to predict the price
of general index of ASE. Preliminary research has
shown that the proposed model has a better overall
accuracy than MLR model. In this work, we demon-
strated how GAs and NNs can be used to predict the
financial market. NNs do have the capability to predict
financial markets and, if properly trained. The indi-
vidual investor could benefit from the use of this fore-
casting tool. We plan to extend our effort towards im-
proving the learning methodology for ANN by using
other approaches such as Fuzzy Logic. We also plan to
build more complex models of Amman index using
selected datasets.
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68
K. Eghnam received her B.Sc. degree in Computer Science from Al-
Balqa Applied University in 1999. She received an MSc in Computer
Science from the same university in 2001. She is presently a full-
time instructor at Al-Balqa Applied University. Her research interests
are mainly from the areas of software engineering and artificial intel-
ligene.
A. Sheta received his B.E., M.Sc. degrees in Electronics and Com-
munication Engineering from the Faculty of Engineering, Cairo Uni-
versity in 1988 and 1994, respectively. A. Sheta received his Ph.D.
degree from the Computer Science Department, School of Informa-
tion Technology, George Mason University, Fairfax, VA, USA in 1997.
Currently, Prof. Sheta is working with the Computer Science Depar-
ment at the World Islamic Sciences and Education University
(W.I.S.E.), Amman, Jordan. His research interests include Neural
Networks, Evolutionary Computation, Modelling and Simulation of
Dynamical Systems, Robotics, Automatic Control, Fuzzy Logic, and
Swarm Intelligence. Prof. Sheta served as a chair or co-chair for
number of workshops and special sessions within international cofe-
rences in the area of Computer Science and Engineering. He has
been an invited speaker in number of national and international cofe-
rences.
S. Bani-Ahmad received his B.Sc. degree in Electrical Engineer-
ing/Computer Engineering from the department of Electrical Engi-
neering, Jordan University of Science and technology in 1999. He
received an MS in Computer Science from the school of Information
Technology at Al-Albayt University in Jordan, in 2001. He received
his Ph.D. degree in Computing and Information Systems from the
department of Electrical Engineering and Computer Science at Case
Western Reserve University, Cleveland - Ohio, USA, in 2008. He is
presently a professor at Al-Balqa Applied University, Salt, Jordan.