Gated Experts for Classification of Financial Time Series

this paper are neural networks whose forecasts are combined by another neural network, a gate. For regression problems such an architecture was shown to partly remedy the two main problems in forecasting real world time series: nonstationarity and overfitting. The goal of this paper is to compare the forecasting ability of gated experts (GE) with a that of a single neural network expert on a time series classification task, which corresponds to decisions of taking a long position in a stock, a short position, or doing nothing. A new error function and a weight update rule were derived for this problem. The architecture was tested on the actual stock market data, and the errors on both training and testing data were smaller than errors for the best expert. This suggests that the performance of any single stock market forecasting system can be improved by making several copies of it and training them under the GE framework. In addition, an algorithm is presented for the GE architecture that makes it possible for the model to modify the data to fit the model better. Such a modification is done only if the decrease in the model cost associated with the output error is less than the increase in the input cost associated with moving the data away from its initial values. This idea corresponds to a bi-directional search for the true model, which was shown in AI to cut in half the exponent in the search time in comparison to the standard unidirectional search used by most connectionist architectures. The implementation of this algorithm was show to further decrease overfitting on the testing data