Think Twice Before Plugging Variables into Model

DOI

10.2991/978-94-6463-488-4_48How to use a DOI?

Keywords

LSTM; P/E ratio; momentum effect

Abstract

With the development of artificial intelligence, an increasing number of AI models are being applied in the financial sector. The Long Short-Term Memory (LSTM) model, as an AI model for processing time-series data, has achieved promising results in the investment field. Currently, many studies use LSTM models with inputs mainly consisting of variables such as prices, returns, and volatility, while some studies also include additional variables to improve prediction accuracy. However, these studies lack sufficient discourse on why these variables are chosen and what variables should be inputted. This is due to the lack of interpretability of the relationships between variables in AI models, resulting in a decreasing emphasis on the theoretical connection between input data and prediction results. In this study, we use LSTM models to predict stock returns, with both return and price-to-earnings ratio (P/E ratio) sequences as inputs. Based on the change in LSTM model prediction accuracy resulting from different input data, we suggest that providing more variables without selection may not necessarily lead to better prediction results. For the LSTM model, the momentum effect of the input variable sequence is related to its prediction accuracy, and grouping stocks according to P/E ratio indicators can improve the predictive performance of the LSTM model.

Copyright

© 2024 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Xing You Li
PY  - 2024
DA  - 2024/08/29
TI  - Think Twice Before Plugging Variables into Model
BT  - Proceedings of the 2024 2nd International Conference on Digital Economy and Management Science (CDEMS 2024)
PB  - Atlantis Press
SP  - 427
EP  - 436
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-488-4_48
DO  - 10.2991/978-94-6463-488-4_48
ID  - Li2024
ER  -