Application of hybrid fuzzy interval-based machine learning models on financial time series - A case study of Taiwan biotech index during the epidemic period

Abstract

In recent years, the use of machine learning to predict stock market indices has emerged as a vital concern in the FinTech domain. However, the inherent nature of point estimation in traditional supervised machine learning models leads to an almost negligible probability of achieving perfect predictions, significantly constraining the applicability of machine learning prediction models. This study employs 4 machine learning models, namely BPN, LSTM, RF, and ELM, to establish predictive models for the Taiwan biotech index during the COVID-19 period. Additionally, it integrates the Gaussian membership function MF from fuzzy theory to develop 4 hybrid fuzzy interval-based machine learning models, evaluating their predictive accuracy through empirical analysis and comparing them with conventional point estimation models. The empirical data is sourced from the financial time series of the "M1722 Listed Biotechnology and Medical Care Index" compiled by the Taiwan Economic Journal during the outbreak of the COVID-19 pandemic, aiming to understand the effectiveness of machine learning models in the face of significant disruptive factors like the pandemic. The findings demonstrate that despite the influence of COVID-19, machine learning remains effective. LSTM performs the best among the models, both in traditional mode and after fuzzy interval enhancement, followed by the ELM and RF models. The predictive results of these three models reach a certain level of accuracy and all outperform the BPN model. Fuzzy-LSTM effectively predicts at a 68% confidence level, while Fuzzy-ELM and Fuzzy-RF yield better results at a 95% confidence level. Fuzzy-BPN exhibits the lowest predictive accuracy. Overall, the fuzzy interval-based LSTM excels in time series prediction, suggesting its potential application in forecasting time series data in financial markets to enhance the efficacy of investment analysis for investors.

Keywords: BPN; ELM; LSTM; Random Forest; financial time series; hybrid fuzzy interval-based machine learning model.