Grey system based novel forecasting and portfolio mechanism on CSE

Abstract

Purpose

Because of the high volatility with unstable data patterns in the real world, the ability of forecasting price indices is notoriously embarrassing and represents a major challenge with traditional time series mechanisms; especially, most of the traditional approaches are weak to forecast future predictions in the high volatile and unbalanced frameworks under the global and local financial depressions. The purpose of this paper is to propose a new statistical approach for portfolio selection and stock market forecasting to assist investors as well as stock brokers to predict the future behaviors.

Design/methodology/approach

This study mainly takes an attempt to understand the trends, behavioral patterns and predict the future estimations under the new proposed frame for the Colombo Stock Exchange (CSE), Sri Lanka. The methodology of this study is carried out under the two main phases. In the first phase, constructed a new portfolio mechanism based on k-means clustering. In the second stage, proposed a nonlinear forecasting methodology based on grey mechanism for forecasting stock market indices under the high-volatile fluctuations. The autoregressive integrated moving average (ARIMA) predictions are used as comparison mode.

Findings

Initially, the k-mean clustering was applied to pick out the profitable sectors running under the CSE and results indicated that BFI is more significant than other 20 sectors. Second, the MAE, MAPE and MAD model comparison results clearly suggested that, the newly proposed nonlinear grey Bernoulli model (NGBM) is more appropriate than traditional ARIMA methods to forecast stock price indices under the non-stationary market conditions.

Practical implications

Because of the flexible nonlinear modeling capability, proposed novel concepts are more suitable for applying in various areas in the field of financial, economic, military, geological and agricultural systems for pattern recognition, classification, time series forecasting, etc.

Originality/value

For the large sample of data forecasting under the normality assumptions, the traditional time series methodologies are more suitable than grey methodologies. However, the NGBM is better both in model building and ex post testing stagers under the s-distributed data patterns with limited data forecastings.

Citation

Rathnayaka, R.M.K.T., Seneviratna, D.M.K.N. and Jianguo, W. (2016), "Grey system based novel forecasting and portfolio mechanism on CSE", Grey Systems: Theory and Application, Vol. 6 No. 2, pp. 126-142. https://doi.org/10.1108/GS-02-2016-0004