Separating Order from Disorder in a Stock Index Using Wavelet Neural Networks

: In order to determine how much deterministic structure, if any, is present in the behavior of price yields for a stock index, the following practical investment problem is defined: Decide today whether to switch in or out of an S&P 500 index fund, where an initial $10,000 investment will be held for 13 weeks, after which the decision-making process is to be repeated. The alternative investment is a risk-free instrument yielding 5% compound annual rate of return. The performance of the buy-and-hold strategy is compared to the use of wavelet neural network (WNN) trading advisors. The decisions made by the WNNs are based on 13-week holding-period yield data available only up to the decision moment. It is shown that very simple WNNs are able to match or exceed the performance of buy-and-hold strategy, thus suggesting that a small but not inconsequential deterministic component may be separated from the sea of randomness in a stock index. I. IS THERE ORDER WITHIN DISORDER IN MARKET INDICE..