A Hybrid Deep Learning Framework for Stock Price Prediction Considering the Investor Sentiment of Online Forum Enhanced by Popularity ArXiv ID: 2405.10584 “View on arXiv” Authors: Unknown Abstract Stock price prediction has always been a difficult task for forecasters. Using cutting-edge deep learning techniques, stock price prediction based on investor sentiment extracted from online forums has become feasible. We propose a novel hybrid deep learning framework for predicting stock prices. The framework leverages the XLNET model to analyze the sentiment conveyed in user posts on online forums, combines these sentiments with the post popularity factor to compute daily group sentiments, and integrates this information with stock technical indicators into an improved BiLSTM-highway model for stock price prediction. Through a series of comparative experiments involving four stocks on the Chinese stock market, it is demonstrated that the hybrid framework effectively predicts stock prices. This study reveals the necessity of analyzing investors’ textual views for stock price prediction. ...

Data-generating process and time-series asset pricing ArXiv ID: 2405.10920 “View on arXiv” Authors: Unknown Abstract We study the data-generating processes for factors expressed in return differences, which the literature on time-series asset pricing seems to have overlooked. For the factors’ data-generating processes or long-short zero-cost portfolios, a meaningful definition of returns is impossible; further, the compounded market factor (MF) significantly underestimates the return difference between the market and the risk-free rate compounded separately. Surprisingly, if MF were treated coercively as periodic-rebalancing long-short (i.e., the same as size and value), Fama-French three-factor (FF3) would be economically unattractive for lacking compounding and irrelevant for suffering from the small “size of an effect.” Otherwise, FF3 might be misspecified if MF were buy-and-hold long-short. Finally, we show that OLS with net returns for single-index models leads to inflated alphas, exaggerated t-values, and overestimated Sharpe ratios (SR); worse, net returns may lead to pathological alphas and SRs. We propose defining factors (and SRs) with non-difference compound returns. ...

Is the annualized compounded return of Medallion over 35%? ArXiv ID: 2405.10917 “View on arXiv” Authors: Unknown Abstract It is a challenge to estimate fund performance by compounded returns. Arguably, it is incorrect to use yearly returns directly for compounding, with reported annualized return of above 60% for Medallion for the 31 years up to 2018. We propose an estimation based on fund sizes and trading profits and obtain a compounded return of 31.8% before fees. Alternatively, we suggest using the manager’s wealth as a proxy and arriving at a compounded growth rate of 25.6% for Simons for the 33 years up to 2020. We conclude that the annualized compounded return of Medallion before fees is probably under 35%. Our findings have implications for correctly estimating fund performance. ...

“Microstructure Modes” – Disentangling the Joint Dynamics of Prices & Order Flow ArXiv ID: 2405.10654 “View on arXiv” Authors: Unknown Abstract Understanding the micro-dynamics of asset prices in modern electronic order books is crucial for investors and regulators. In this paper, we use an order by order Eurostoxx database spanning over 3 years to analyze the joint dynamics of prices and order flow. In order to alleviate various problems caused by high-frequency noise, we propose a double coarse-graining procedure that allows us to extract meaningful information at the minute time scale. We use Principal Component Analysis to construct “microstructure modes” that describe the most common flow/return patterns and allow one to separate them into bid-ask symmetric and bid-ask anti-symmetric. We define and calibrate a Vector Auto-Regressive (VAR) model that encodes the dynamical evolution of these modes. The parameters of the VAR model are found to be extremely stable in time, and lead to relatively high $R^2$ prediction scores, especially for symmetric liquidity modes. The VAR model becomes marginally unstable as more lags are included, reflecting the long-memory nature of flows and giving some further credence to the possibility of “endogenous liquidity crises”. Although very satisfactory on several counts, we show that our VAR framework does not account for the well known square-root law of price impact. ...

To Trade Or Not To Trade: Cascading Waterfall Round Robin Rebalancing Mechanism for Cryptocurrencies ArXiv ID: 2407.12150 “View on arXiv” Authors: Unknown Abstract We have designed an innovative portfolio rebalancing mechanism termed the Cascading Waterfall Round Robin Mechanism. This algorithmic approach recommends an ideal size and number of trades for each asset during the periodic rebalancing process, factoring in the gas fee and slippage. The essence of the model we have created gives indications regarding whether trades should be made on individual assets depending on the uncertainty in the micro - asset level characteristics - and macro - aggregate market factors - environments. In the hyper-volatile crypto market, our approach to daily rebalancing will benefit from volatility. Price movements will cause our algorithm to buy assets that drop in prices and sell as they soar. In fact, the buying and selling happen only when certain boundaries are crossed in order to weed out any market noise and ensure sound trade execution. We have provided several numerical examples to illustrate the steps - including the calculation of several intermediate variables - of our rebalancing mechanism. The Algorithm we have developed can be easily applied outside blockchain to investment funds across all asset classes at any trading frequency and rebalancing duration. Shakespeare As A Crypto Trader: To Trade Or Not To Trade, that is the Question, Whether an Optimizer can Yield the Answer, Against the Spikes and Crashes of Markets Gone Wild, To Quench One’s Thirst before Liquidity Runs Dry, Or Wait till the Tide of Momentum turns Mild. ...

Clearing time randomization and transaction fees for auction market design ArXiv ID: 2405.09764 “View on arXiv” Authors: Unknown Abstract Flaws of a continuous limit order book mechanism raise the question of whether a continuous trading session and a periodic auction session would bring better efficiency. This paper wants to go further in designing a periodic auction when both a continuous market and a periodic auction market are available to traders. In a periodic auction, we discover that a strategic trader could take advantage of the accumulated information available along the auction duration by arriving at the latest moment before the auction closes, increasing the price impact on the market. Such price impact moves the clearing price away from the efficient price and may disturb the efficiency of a periodic auction market. We thus propose and quantify the effect of two remedies to mitigate these flaws: randomizing the auction’s closing time and optimally designing a transaction fees policy for both the strategic traders and other market participants. Our results show that these policies encourage a strategic trader to send their orders earlier to enhance the efficiency of the auction market, illustrated by data extracted from Alphabet and Apple stocks. ...

NIFTY Financial News Headlines Dataset ArXiv ID: 2405.09747 “View on arXiv” Authors: Unknown Abstract We introduce and make publicly available the NIFTY Financial News Headlines dataset, designed to facilitate and advance research in financial market forecasting using large language models (LLMs). This dataset comprises two distinct versions tailored for different modeling approaches: (i) NIFTY-LM, which targets supervised fine-tuning (SFT) of LLMs with an auto-regressive, causal language-modeling objective, and (ii) NIFTY-RL, formatted specifically for alignment methods (like reinforcement learning from human feedback (RLHF)) to align LLMs via rejection sampling and reward modeling. Each dataset version provides curated, high-quality data incorporating comprehensive metadata, market indices, and deduplicated financial news headlines systematically filtered and ranked to suit modern LLM frameworks. We also include experiments demonstrating some applications of the dataset in tasks like stock price movement and the role of LLM embeddings in information acquisition/richness. The NIFTY dataset along with utilities (like truncating prompt’s context length systematically) are available on Hugging Face at https://huggingface.co/datasets/raeidsaqur/NIFTY. ...

Optimal Text-Based Time-Series Indices ArXiv ID: 2405.10449 “View on arXiv” Authors: Unknown Abstract We propose an approach to construct text-based time-series indices in an optimal way–typically, indices that maximize the contemporaneous relation or the predictive performance with respect to a target variable, such as inflation. We illustrate our methodology with a corpus of news articles from the Wall Street Journal by optimizing text-based indices focusing on tracking the VIX index and inflation expectations. Our results highlight the superior performance of our approach compared to existing indices. ...

The $κ$-generalised Distribution for Stock Returns ArXiv ID: 2405.09929 “View on arXiv” Authors: Unknown Abstract Empirical evidence shows stock returns are often heavy-tailed rather than normally distributed. The $κ$-generalised distribution, originated in the context of statistical physics by Kaniadakis, is characterised by the $κ$-exponential function that is asymptotically exponential for small values and asymptotically power law for large values. This proves to be a useful property and makes it a good candidate distribution for many types of quantities. In this paper we focus on fitting historic daily stock returns for the FTSE 100 and the top 100 Nasdaq stocks. Using a Monte-Carlo goodness of fit test there is evidence that the $κ$-generalised distribution is a good fit for a significant proportion of the 200 stock returns analysed. ...

Cost-Benefit Analysis using Modular Dynamic Fault Tree Analysis and Monte Carlo Simulations for Condition-based Maintenance of Unmanned Systems ArXiv ID: 2405.09519 “View on arXiv” Authors: Unknown Abstract Recent developments in condition-based maintenance (CBM) have helped make it a promising approach to maintenance cost avoidance in engineering systems. By performing maintenance based on conditions of the component with regards to failure or time, there is potential to avoid the large costs of system shutdown and maintenance delays. However, CBM requires a large investment cost compared to other available maintenance strategies. The investment cost is required for research, development, and implementation. Despite the potential to avoid significant maintenance costs, the large investment cost of CBM makes decision makers hesitant to implement. This study is the first in the literature that attempts to address the problem of conducting a cost-benefit analysis (CBA) for implementing CBM concepts for unmanned systems. This paper proposes a method for conducting a CBA to determine the return on investment (ROI) of potential CBM strategies. The CBA seeks to compare different CBM strategies based on the differences in the various maintenance requirements associated with maintaining a multi-component, unmanned system. The proposed method uses modular dynamic fault tree analysis (MDFTA) with Monte Carlo simulations (MCS) to assess the various maintenance requirements. The proposed method is demonstrated on an unmanned surface vessel (USV) example taken from the literature that consists of 5 subsystems and 71 components. Following this USV example, it is found that selecting different combinations of components for a CBM strategy can have a significant impact on maintenance requirements and ROI by impacting cost avoidances and investment costs. ...