A Hybrid Model Combining Discrete Wavelet Transform and Nonlinear Autoregressive Neural Network for Stock Price Prediction: An Application in the Egyptian Exchange

Abstract

Forecasting stock prices is crucial for successful investment in financial markets. However, it is challenging due to the nonlinearity and high volatility caused by various factors influencing price movements. This paper proposes a hybrid model that integrates the discrete wavelet transform (DWT) with the nonlinear autoregressive neural network (NARNN) to predict stock prices. Following the division of stock prices into training and testing sets, the DWT decomposes the training set into low- and high-frequency components reducing the noise and lessening the data's nonlinearity. Then, the obtained components are used to train the NARNNs. To predict the future components, the model decomposes the preceding available prices at each time step and utilizes the latest eight points as input to the NARNNs. Eventually, NARNNs' outputs are combined to provide the final predicted prices. In previous works, the entire dataset is first decomposed and then partitioned into training and testing sets. This unrealistic approach causes the testing set to inherit information regarding stocks' future performance, leading to optimistic deceptive results. Twenty-four stocks from the Egyptian Exchange (EGX-30) are utilized to validate the proposed model's performance. The DWT-NARNN model is compared against other methods, and the empirical findings show that it performs the best.

Enhancing the Quality of Compressed Breast Ultrasound Imagery through Application of Wavelet Convolutional Neural Networks

“…Some other variants of WCNNs were also been proposed in the following years [35][36][37]. Besides, Fathi et al [38] developed a hybrid Wavelet Neural Network model, combining DWT and NARNN, for stock price forecasting. This approach ensures enhanced accuracy by first decomposing stock data with DWT.…”