Predicting stock index increments by neural networks: The role of trading volume under different horizons
Recent studies show that there is a significant bidirectional nonlinear causality between stock return and trading volume. In this research, we reinforce this statement and the results presented in some earlier literatures and further investigate whether trading volume can significantly improve the prediction performance of neural networks under short-, medium-and long-term forecasting horizons. An application of component-based neural networks is used in forecasting one-step ahead stock index increments. The models are also augmented by the addition of different combinations of indices and component stocks trading volumes as inputs to form more general ex-ante forecasting models. Neural networks are trained with the data of stock returns and volumes from NASDAQ, DJIA and STI indices. Results indicate that augmented neural network models with trading volumes lead to improvements, at different extents, in forecasting performance under different terms of forecasting horizon. Empirical results indicate that trading volumes lead to modest improvements on the performance of stock index increments prediction under medium-and long-term horizons.
component-based neural networks stock trading volume financial forecasting