Portfolio Formation Using Diagonal Quadratic Discriminant Analysis and Weighting Based on Posterior Probability

Subject Areas : Financial engineering

Saeid Fallahpour ¹ ( Assistant Professor of Tehran University, Tehran, Iran )
H. Pirayesh Shirazinejad ² ( Master of Financial Engineering, Tehran, Iran )

Received: 2017-09-05 Accepted : 2017-12-06 Published : 2018-03-21

Keywords: Classification, Feature Selection, discriminant analysis, Support vector machine, Posterior Probity,

Abstract :

Stock return forecasting is one of the most important question for investing in Stock markets. Because of the effects of policy, economic, etc., we need moderns and intelligent models to forecast the returns. The main idea in this research is classifying the stocks into high and low return groups, for this purpose support vector machine (SVM) was used. To elect the best variables for models we used sequential feature selection and in order to evaluate the accuracy of SVM we do the same forecasting with diagonal quadratic discriminant analysis (DQDA). By using paired t-test, we conclude that models have no significant difference. Equal weighted portfolios were created for each models with and without feature selection also, we used posterior probability to weight the portfolio of DQDA with feature selection. The returns were calculated for each portfolio during the years 1388-1391. The simulating results are satisfying and all portfolios’ returns are better than market portfolio.