Expert Systems with Applications 38 (2011) 475485

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Expert Systems with Applications

journal homepage: www.elsevier.com/locate/eswa

An adaptive ordered fuzzy time series with application to FOREX

Majid Bahrepour a,*, Mohammad-R. Akbarzadeh-T. b, Mahdi Yaghoobi a, Mohammad-B. Naghibi-S. c
a

Islamic Azad University, Mashhad Branch, Iran

Center for Applied Research on Intelligent Systems and Soft Computing, Departments of Electrical Engineering and Computer Engineering, Ferdowsi University of Mashhad, Iran
c
Department of Electrical Engineering, Ferdowsi University of Mashhad, Iran
b

a r t i c l e

i n f o

Keywords:
Fuzzy time series
Adaptive order selection
Self-organising maps
FOREX
Prediction

a b s t r a c t
An adaptive ordered fuzzy time series is proposed that employs an adaptive order selection algorithm for
composing the rule structure and partitions the universe of discourse into unequal intervals based on a
fast self-organising strategy. The automatic order selection of FTS as well as the adaptive partitioning of
each interval in the universe of discourse is shown to greatly affect forecasting accuracy. This strategy is
then applied to prediction of FOREX market. Financial markets, such as FOREX, are generally attractive
applications of FTS due to their poorly understood model as well as their great deal of uncertainty in
terms of quote uctuations and the behaviours of the humans in the loop. Specically, since the FOREX
market can exhibit different behaviours at different times, the adaptive order selection is executed online
to nd the best order of the FTS for current prediction. The order selection module uses voting, statistical
analytic and emotional decision making agents. Comparison of the proposed method with earlier studies
demonstrates improved prediction accuracy at similar computation cost.
2010 Elsevier Ltd. All rights reserved.

1. Introduction
Forecasting time series data from a time-dependant sequence of
continuous values is important in a wide array of applications such
as monitoring the air pollution in the environment, estimating
blood pressure, predicting market trends in both stocks and foreign
exchange markets (Li & Cheng, 2007). In 1993, Song and Chissom
proposed a new concept of time series data prediction, namely
Fuzzy Time Series (FTS) which uses the notion of fuzzy sets and
approximate reasoning (Song & Chissom, 1993a, 1993b, 1994).
They studied the problem of forecasting fuzzy time series by using
the enrolment data in the University of Alabama and proposed a
forecasting model that is mainly composed of ve steps: (1) partitioning the universe of discourse into equal intervals, (2) dening
fuzzy sets on the universe of discourse and fuzzifying the time series accordingly, (3) mining the fuzzy logical relationships that exists in the fuzzied time series, (4) forecasting and then (5)
defuzzifying the forecasted output. Song and Chissom showed
these steps to reduce the time complexity of FTS in comparison
with the previous studies.
Since the contribution of Song and Chissom, a number of other
studies have been presented to either reduce computational
overhead or increase forecasting accuracy. For example, to reduce

* Corresponding author. Tel.: +31 53 489 3765; fax: +31 53 489 4590.
E-mail addresses: M.Bahrepour@utwente.nl (M. Bahrepour), Akbarzadeh@
ieee.org (Mohammad-R. Akbarzadeh-T.).
0957-4174/$ - see front matter 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.eswa.2010.06.087

computational overhead being produced in deriving the fuzzy relationship in Song and Chissoms model, Sullivan and Woodall
proposed a Markov-based model (Sullivan & Woodall, 1994) using
a conventional matrix multiplication. Also in 1994, Song and
Chissom applied a rst-order time-variant strategy for forecasting
enrolment and discussed the differences between time-variant and
time invariant models (Song & Chissom, 1994). To improve forecasting accuracy, Chen presented an efcient forecasting procedure
for prediction of enrolments in the University of Alabama using
simplied arithmetic operations (Chen, 1996) that reduced the
complex arithmetic operations to some essential operations. Huarng proposed heuristic models by integrating problem specic
heuristic knowledge with Chens model to reduce forecasting error
(Huarng, 2001). Chen in his later works proposed a high-order fuzzy time series in which more than one step behind are given in the
inputs of FTS for prediction (Chen, 2002). His work was compared
with the previous studies that used only one previous step to provide the prediction. The high-order FTS revealed that prediction
accuracy ratio is signicantly increased by using higher order of inputs (more than one step behind as the input of FTS). Yu proposed
a weighted averaging operator to record occurrences of each fuzzy
relation and applied a weighting factor for the defuzzication (Yu,
2005). Li et al. proposed deterministic automatons to deal with the
uncertainties in defuzzifying phase and partitioning phase (Li &
Cheng, 2007). Bahrepour et al. modied Yus weighting model by
partitioning the universe of discourse unequally by using genetic
algorithm (Bahrepour et al., 2008). In their study, genetic algorithm

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

was employed to nd the optimal length of each partition along

with the weighted averaging technique. Similar study was also
reported in Bahrepour et al. (2008), Chen and Chung (2006). But
a GA-based approach is inherently slow, and hence not applicable
for fast decision making under rapid changes in behaviour of markets such as FOREX. More specically, using GA to partition universe of discourse unequally, the time complexity is OGeneticAlgorithm =
(G  I  q2), where G is the number of generations, I is the number
of individuals, and q is number of training data in computing the
tness function. This time complexity is further discussed in
Section 4.4.
In this paper, a novel approach to high-order fuzzy time series is
presented. The proposed model is different from the previous studies in two facets. First is the use of a self-organising map (SOM) to
partition the universe of discourse unequally. SOM is chosen here
for its fast clustering function, particularly when compared with
genetic algorithm (GA). Using SOM and Kohonen training algorithm, the time complexity of partitioning the universe of discourse to n unequal intervals is reduced to OSOM = (k  n) where k
is the training epochs and n is the number of intervals. The training
algorithm is described in Section 3 and the time complexity is
proved in Section 4.4.
The second facet of the presented approach is an adaptive order
selection that nds the best estimated order by incorporating three
different agents that are voting agent, statistical agent and emotional agent. These agents work sequentially to nd the best order
of the high-order fuzzy time series. The voting agent tries to reach
a consensus between different solutions. This consensus should be
computationally inexpensive, yet efcient. Statistical analyst agent
analyses the data for inconsistencies between data and removing
those inconsistent solutions. And the emotional decision making
agent provides an emotional signal when none of the previous
agents can obtain a reliable solution. This signal is similar to a
gut-feeling which is adapted from Somatic Marker Hypothesis
(SMH) (Bechara & Damasio, 2005).
The rest of this paper is organised as follows: Sections 2 and 3
review the basics of fuzzy time series and self-organising maps,
respectively. The proposed method is explained in Section 4. Section 5 reports application of the proposed technique to FOREX market and provides empirical analysis. Finally, conclusions are made
in Section 6.
2. Fuzzy time series basics
Several basic denitions and principles of FTS are reviewed
here.
Let U(t)  R (t = . . . , 0, 1, 2, . . .) be the universe of discourse on
which fuzzy values (sets) fi(t) (i = 1, 2, . . .) are dened, and let F(t)
be a sequence of fi(t). Then, F(t) is called fuzzy time series on U(t)
(t = . . . , 0, 1, 2, . . .). Let F(t) and F(t  1) be fuzzy time series on U(t)
and U(t  1) (t = . . . , 0, 1, 2, . . .). If for any fj(t) (j = 1, 2, . . .) 2 F(t),
there exists an fi(t  1) (i = 1, 2, . . .) 2 F(t  1) such that there is a
rst-order fuzzy relation R(t, t  1) and fj(t) = fi(t  1)  Rij(t, t  1),
then F(t) is said to be caused by F(t  1). This can be denoted as
fi(t  1) ? fj(t) or equivalently F(t  1) ? F(t). Song and Chissom
derived the rst-order model based on the rst-order relation
and extended it to mth-order model (Song, 1993).
Denition 1. Suppose F(t) is caused by F(t  1) orF(t  2) or . . . or
F(t  m) (m > 0) only. The relation between F(t) and its cause can
then be expressed by the following fuzzy relational equation:

Ft Ft  1  Rt; t  1 or
Ft Ft  2  Rt; t  2 or
Ft Ft  m  Rt; t  m

...

Or alternatively

Ft Ft  1 [ Ft  2 [    [ Ft  m  Rt; t  m

where [ is the union and  is the composition operators.

R(t, t  m) is a relation matrix to describe the fuzzy relationship between F(t  m) and F(t). Eq. (1) is called rst-order model of F(t).
From Denition 1, we note that (Chen, 2002):
1. F(t) is a function of time.
2. F(t) is a linguistic function, i.e. a function whose values are linguistic values represented by fuzzy sets.
3. fi(t) (i = 1, 2, . . .) are possible linguistic values (fuzzy sets) that
belong to F(t), where F(t) is a series of fi(t) (i = 1, 2, . . .).
Denition 2. Suppose that F(t) is caused by F(t  1), F(t  2), . . .,
and F(t  m) (m > 0) simultaneously. This relation can be expressed
by the following fuzzy relational equation:

Ft Ft  1; Ft  2; . . . ; Ft  m  Ra t; t  m

The equation is called the mth-order of F(t), and Ra(t, t  m) is a relation matrix to describe the fuzzy relationship between
F(t  1), F(t  2), . . . , F(t  m) and F(t) (Chen, 2002). In short, Eq. (2)
means that more than one input in composition with a relational
matrix can produce the predicted result.
Based upon the above preliminaries, the proposed approach
(similar to most other approaches on fuzzy time series) is presented in Section 4.
3. An introduction to self-organising maps
SOMs consist of components called nodes that are centres of
clusters in clustering application of SOMs . . . (Software, 2004). In
our study, a simple self-organising map is used to bundle historical
data into clusters. These clusters are then used for partitioning the
universe of discourse unequally. The Kohonen training algorithm is
widely used in this network as follows:
(1) Initialise centre of each cluster, Ci (i = 1, 2, . . . , n), randomly.
(2) Grab an input vector
(3) Traverse each centre of cluster
a. Use a similarity measure to nd the distance between
each cluster centre Ci (i = 1, 2, . . . , n) and the input data
vector Dj. Euclidean distance is a common measure of
similarity, as in this paper, and is calculated a bellow:

dC il ; Djl

Xm
2
C

D

il
jl
l1

where Cil, Djl are the lth elements of two vectors Ci and Dj, and
m is the vector dimension.
b. Find the cluster centre C* which produces the smallest
distance with the input vector.
(4) Update the neighbours of the cluster centre C*, Cv
(v = 1, 2, . . . , k), where Cv is a neighbour of the C* and k is
the number of C*s neighbours. This update is performed
by pulling Cv closer to the input data vector D(t) by using
the bellow formula

C v t 1 C v t HtatDt  C v t
where t is the current iteration, H(t) is restraint due to distance from C*, and a(t) is learning restraint due to time.
(5) Increment t and repeat while t < T, where T is limit on time
iterations.

or
The outputs of SOM is a set of Ci (i = 1, 2, . . . , n) which is a set of
cluster centres. Further information on SOMs can be found in

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

Gurney (1997), Demuth, Beale, and Hagan (2006), Gupta, Jin, and
Homma (2003).
4. Proposed approach
In this study, two modications are proposed on Chens
high-order fuzzy time series (Chen, 2002). First modication is partitioning the universe of discourse unequally by using the SOM,
and the second is to adaptively nd the best order of the FTS.
SOM is important due to its fast clustering function which can bundle data into clusters faster than GA (Section 4.4 addresses this
time complexity). In the previous studies such as Chens and Bahrepours (Bahrepour et al., 2008; Chen & Chung, 2006), GA was
used to nd the best length of the intervals. To reduce computational overhead during the partitioning of the universe of discourse, SOM is recommended here; and to augment prediction
accuracy ratio, the adaptive order selection is introduced.
In the following, the proposed algorithm is presented in several
steps. An example on the USD/JPY currency-pair serves to illustrate
the approach. This approach is then applied in Section 5 to FOREX
daily dataset.
4.1. The algorithm
Step 1. Partition the universe of discourse U into n unequal
intervals (where U = {u1, u2, . . ., un}. This partitioning is accomplished by the following routine:
I. Find the centre of n clusters (c1, c2, . . . , cn) using SOM.
II. Let Dmin and Dmax be the minimum value and the maximum
value of the historical data (minimum and maximum quotes
in FOREX dataset example). Let U = [Dmin  D1, Dmax + D2] be
the universe of discourse, where D1 and D2 are two proper
positive numbers for marginal extensions (that might be
needed for unseen data), then U is partitioned into n unequal
intervals by the below rule:

where n = 7. Table 1 contains a number of USD/JPY quotes with their

corresponding linguistic value.
Step 3. Derive fuzzy logical relationships. These relationships
are used for prediction in the next step. For example if the quotes
at time t  1 is A5 and at time t is A7 then A5 ? A7 (according to Definition 1 for rst-order fuzzy time series). Since a fuzzy variable
may entail more than one output (e.g. A1 entails A3 and A5 at two
different times), all the entailed values should be gathered in
groups. In addition, the repetitive observations are stored in the
groups (e.g. if A3 entails A6 on two different occasions, this is stored
as A3 ? {A6, A6}). Therefore all the fuzzied historical data should
be gathered in the groups. An example of the fuzzy logical relationships for the rst-order model is illustrated in Table 2.
From Denition 2, mth-order relationships are similarly groupbased like: Aj1, Aj2, . . . , Ajk ? {Aj1, Aj2, . . . , Ajl}, where k is the order of
FTS, j index refers to different linguistic variables, and l is the number of entailed linguistic values.
For the example of USD/JPY quote prediction, some fuzzy logical
relationships are shown in Table 3. The number sign (#) indicates
the null or the missing values, i.e. there is no corresponding input/
output in the historical data.
These relationships are used in the next step for prediction and
defuzzication. In the proposed model, these relationships are driven for rst-order, second-order, and up to mth-order; where m is
determined by the user. The adaptive order selection module then
nds the best order among these m predictions.
Step 4. Forecasting and defuzzifying. In this step the input and
the fuzzy logical relationships (being obtained from the previous
step) are used to forecast and defuzzify the forecasted result. The
following rules perform forecast and defuzzication for rst-order
and high-order FTS.

Table 1
Several USD/JPY quotes with their corresponding
linguistic values.





c1 c2
c1 c2 c2 c3
; u2
;
; ...;
u1 Dmin  D1 ;
2
2
2


cn1 cn
; Dmax D2
un
2
In the USD/JPY currency-pair example, (Dmin  D1) = 102 and
(Dmax  D2) = 123. The universe of discourse is partitioned into
seven unequal intervals and the outputs of SOM are c1 = 108,
c2 = 110, c3 = 114, c4 = 115, c5 = 117, c6 = 119, c7 = 121. Therefore,
u1 = [102, 109], u2 = [109, 112], u3 = [112, 113], u4 = [113, 116],
u5 = [116, 118], u6 = [118, 120], u7 = [120, 123].
Step 2. Dene fuzzy sets on the universe of discourse U and
fuzzify the historical data. A fuzzy set Ai of U is dened as
Ai fAi u1 =u1 fAi u2 =u2    fAi un =un , where fAi uj indicates
the grade of membership ujin Ai

Ai fAi u1 =u1 fAi u2 =u2    fAi un =un

1=u1 0:5=u2 0=u3 0=u4 0=u5 0=u6 0=u7

0:5=u1 1=u2 0:5=u3 0=u4 0=u5 0=u6 0=u7
0=u1 0:5=u2 1=u3 0:5=u4 0=u5 0=u6 0=u7
0=u1 0=u2 0:5=u3 1=u4 0:5=u5 0=u6 0=u7
0=u1 0=u2 0=u3 0:5=u4 1=u5 0:5=u6 0=u7
0=u1 0=u2 0=u3 0=u4 0:5=u5 1=u6 0:5=u7
0=u1 0=u2 0=u3 0=u4 0=u5 0:5=u6 1=u7

Linguistic value

104.20
108.34
119.25
112.23
122.45

A1
A1
A6
A3
A7

Table 2
The fuzzy logical relationships for the rst-order model.
A1 ? {A2, A2, A3}
A4 ? {A5, A6}

A2 ? {A1, A2, A3}

A5 ? {A2, A6, A6 , A6}

A3 ? {A1}
A6 ? {A4, A5}

If the data (e.g. the quotes in the example of FOREX dataset) obtains
highest membership degree with Ak, then the fuzzied data is
labelled as Ak. For example, linguistic values are dened as:

A1
A2
A3
A4
A5
A6
A7

USD/JPY quotes

Table 3
The fuzzy logical relationships for the high-order model.
Second-order

Third-order

A1, A1 ? {A2, A3}

A1, A2 ? {A1}
A2, A3 ? {A1, A2, A3, A3}
A7, A6 ? #

#, A1, A1 ? {A2}
A1, A1, A2 ? {A1, A3}
A2, A2, A3 ? {A2, A3, A3}
A6, A7, A7 ? #

Fourth-order
#, A1, A1, A1 ? {A2, A4}
A1, A1, A2, A2 ? {A1, A3, A3}
A1, A2, A2, A3 ? {A2, A3, A4, A4}
A6, A6, A7, A7 ? #

Fifth-order
#, A1, A1, A1, A2 ? {A2, A4, A5}
A1, A1, A2 ,A2, A3 ? {A3, A3}
A1, A2 ,A2, A3, A3 ? {A2, A4}
A5, A6, A6, A7, A7 ? #

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

Pk

First-order FTS:
Rule 1: If F(t  1) = Ai, and Ai ? { }, i.e. there is no match/precedence in historical data for Ai, then the predicted result
^ at time t is the midpoint of interval ui being centre of
y
the ith cluster (ci) in which the maximum membership
degree of Ai is located

^ ci
y
In other words, in the absence of earlier historical data with
similar conditions, the best assumption is that there is no
change in the time series. For example, we have the following fuzzy relationships and the input is A7; since
^ c7 where c7 is the centre of cluster for u7
A7 ! f g; y
where maximum membership of A7 is located.
A1 ? {A2, A2, A3}
A4 ? {A5, A6}

A2 ? {A1, A2, A3}

A5 ? {A2, A6, A6, A6}

A3 ? {A1}
A6 ? {A4, A5}

Rule 2: If F(t  1) = Ai and Ai ? {Aj}, i.e. there is consistently only

one match in the historical data, then the predicted result
^ at time t is the midpoint of interval uj being centre of
y
jth cluster (cj) in which the maximum membership degree
of Aj is located

^ cj
y
For example we have the following fuzzy relationships and
^ c1 where c1 is
the input is A3; since A3 ? {A1} therefore, y
the centre of cluster for u1 where maximum membership of
A1 is located.
A1 ? {A2, A2, A3}
A4 ? {A5, A6}

A2 ? {A1, A2, A3}

A5 ? {A2, A6, A6, A6}

A3 ? {A1}
A6 ? {A4, A5}

Rule 3: If F(t  1) = Ai and Ai ! fAj1 ; Aj2 ; . . . ; AjH g, where H > 1 is the

number of entailed elements, and j refers to different lin^ at time t is
guistic variables, then the predicted result y

^
y

1
c2 c6 c6 c6
4

where c2 and c6 are the centres of clusters for u2 and u6,

respectively (where maximum memberships of A2 and A6
are located).
A1 ? {A2, A2, A3}
A4 ? {A5, A6}

1  i  cjk1i
Pk
i1 i

where cj1, cj2, . . . , cjk are the midpoints (the cluster centres) of
the intervals uj1, uj2, . . . , ujk in which the maximum membership degree of Aj1, Aj2, . . . , Ajk are located, respectively.
For example we have the following fuzzy relationships and
^ is:
the input is A3, A7; since A3, A7 ? { }therefore, y

^
y

2  c7 1  c3
3

where c7 and c3 are the centre of clusters corresponding to

u7 and u3, where maximum membership of A3 and A7 are
also located, respectively.
Second-order

Third-order

A1, A1 ? {A2, A3}

A1, A2 ? {A1}
A2, A3 ? {A1, A2, A3, A3}
A7, A6 ? #

#, A1, A1 ? {A2}
A1, A1, A2 ? {A1, A3}
A2, A2, A3 ? {A2, A3, A3}
A6, A7, A7 ? #

Fourth-order

Fifth-order

#, A1, A1, A1 ? {A2, A4}

A1, A1, A2, A2 ? {A1, A3, A3}
A1, A2, A2, A3 ? {A2, A3, A4, A4}
A6, A6, A7, A7 ? #

#,A1, A1, A1, A2 ? {A2, A4, A5}

A1, A1, A2, A2, A3 ? {A3, A3}
A1, A2, A2, A3, A3 ? {A2, A4}
A5, A6, A6, A7, A7 ? #

Rule 2: If F(t  1) = Aj1, Aj2, . . . , Ajk and Aj1, Aj2, . . . , Ajk ? {Aj1}, where k
is the order of FTS and variable j shows linguistic labels are
^ at time t is the midvaried, then the predicted result y
point (cluster centre or cj1) of interval uj1 in which the maximum membership degree of Aj1 is located

^ cj1
y
For example, if we have the following fuzzy relationships A1,
^ is:
A2 ? {A1}, and the input is A1 ; A2 ; y

^ c1
y

H
1 X
cji
H i1

where cj1, cj2, . . . , cjH are the midpoints (of the cluster centres) of the interval uj1, uj2, . . . , ujH in which the maximum
membership degree of Aj1, Aj2, . . . , AjH are located, respectively.
For example, if we have the following fuzzy relationships
^ is computed as:
A5 ? {A2, A6, A6, A6} and the input is A5, y

^
y

i1 k

^
y

A2 ? {A1, A2, A3}

A5 ? {A2, A6, A6, A6}

where c1 is the centre of cluster for u1 where maximum

membership of A1 is located.
Second-order

Third-order

A1, A1 ? {A2, A3}

A1, A2 ? {A1}
A2, A3 ? {A1, A2, A3, A3}
A7, A6 ? #

#,A1, A1 ? {A2}
A1, A1, A2 ? {A1, A3}
A2, A2, A3 ? {A2, A3, A3}
A6, A7, A7 ? #

Fourth-order

Fifth-order

#, A1, A1, A1 ? {A2, A4}

A1, A1, A2, A2 ? {A1, A3, A3}
A1, A2, A2, A3 ? {A2, A3, A4, A4}
A6, A6, A7, A7 ? #

#, A1, A1, A1, A2 ? {A2, A4, A5}

A1, A1, A2, A2, A3 ? {A3, A3}
A1, A2, A2, A3, A3 ? {A2, A4}
A5, A6, A6, A7, A7 ? #

A3 ? {A1}
A6 ? {A4, A5}

Higher order FTS (kth-order):

Rule 1: If F(t  1) = Aj1, Aj2, . . . , Ajk and Aj1, Aj2, . . . , Ajk ? { }, where k is
the order of FTS and j shows linguistic labels are varied. If
cardinality j{ }j = 0 is zero, i.e. there is no match in the his^ at
torical data forAj1, Aj2, . . . , Ajk, then the predicted result y
time t is:

Rule 3: If F(t  1) = Aj1, Aj2, . . . , Ajk and Aj1, Aj2, . . . , Ajk ? {Aj1, Aj2, . . . ,
AjH} (H > 1), where k is the order of FTS and variable j shows
^ at
linguistic labels are varied, then the predicted result y
time t is

^
y

H
1 X
cji
H i1

where cj1, cj2, . . . , cjH are the midpoints (cluster centres) of

the interval uj1, uj2, . . . , ujH in which the maximum membership degree of Aj1, Aj2, . . . , AjH are located, respectively.

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

For example we have the following fuzzy relationships A2,

^ is:
A3 ? {A1, A2, A3, A3}, and the input is A2, A3, then y

Start

1
^ c1 c2 c3 c3
y
4
where c1, c2, c3 are the midpoints (cluster centres) of the
intervals u1, u2, u3, where maximum membership of A1, A2,
A3 are located respectively.

Second-order

Third-order

A1, A1 ? {A2, A3}

A1, A2 ? {A1}
A2, A3 ? {A1, A2, A3, A3}
A7, A6 ? #

#,A1, A1 ? {A2}
A1, A1, A2 ? {A1, A3}
A2, A2, A3 ? {A2, A3, A3}
A6, A7, A7 ? #

Fourth-order

Fifth-order

#, A1, A1, A1 ? {A2, A4}

A1, A1, A2, A2 ? {A1, A3, A3}
A1, A2, A2, A3 ? {A2, A3, A4, A4}
A6, A6, A7, A7 ? #

#,A1, A1, A1, A2 ? {A2, A4, A5}

A1, A1, A2, A2, A3 ? {A3, A3}
A1, A2, A2, A3, A3 ? {A2, A4}
A5, A6, A6, A7, A7 ? #

Step 5. Compute quantitative measures H and V, as dened below, from the above grouping process of causal relations.
Denition 3. Let H (number of hits) be the number of matched
patterns in the historical data for a given set of antecedent fuzzy
propositions. For example, if F(t  1) = Aj1, Aj2, . . . , Ajk and
Aj1, Aj2, . . . , Ajk ? {Aj1, Aj2, . . . , Ajp}, where k is the order of FTS
(k P 1) and variable j shows linguistic labels can be varied, then
H is the same as the cardinality of H = j{Aj1, Aj2, . . . , Ajp}j = p.
Denition 4. Let V (dispersion) indicate the dispersion among the
elements of a group. For example, consider the relationship, like
F(t  1) = Aj1, Aj2, . . . , Ajk, where k is the order of FTS (k P 1) and variable
j
shows
linguistic
labels
are
varied,
and
Aj1, Aj2, . . . , Ajk ? {A1, A3, A3, A5}. Assume that the maximum membership degrees of {A1, A3, A3, A5} are located in {c1, c3, c3, c5}, respectively. Dispersion can be numerically obtained from the following
formula:
H
1 X
V
ci  c2
H i1

V (dispersion) is the same as variance, H is the number of hits (Definition 3), cis are cluster centres, c is the mean value of the participating cis.
In Step 4, m fuzzy relationships are driven (rst-order, second-order up to mth-order, where m is chosen by the user). In
Step 4, m predicted results are obtained. In this step, a total of
m Vs and Hs are computed. These m predicted results along
with m Hs and Vs are used in the following adaptive order
selection module.
Step 6. Find the best order among the m predicted results by
using the adaptive order selection module and present the predicted result which is chosen by the adaptive order selection module in the output. Algorithm of the adaptive order selection module
is detailed in Section 4.2. Fig. 1 shows the complete owchart of
the proposed approach.
4.2. Adaptive order selection algorithm
The adaptive order selection module employs three agents (voting, statistical and emotional) to nd the best order. These agents
work sequentially by the following order. Fig. 2 shows the algorithm of the adaptive order selection module.

Partition the universe of discourse into n

unequal intervals. Centre of each interval is
determined by a SOM

Define fuzzy sets on the universe of discourse

and place maximum membership degrees on
the centres of the clusters that obtained from
the SOM

Derive fuzzy logical relationships for first order

up to mth order. (m is defined by the user and
usually m>1 because in the next step there
would be m prediction and automatic order
selection will find the best order among these
m prediction)

Forecast and defuzzify the forecasted outputs

for all the m predictions

Compute V (variance) and H (hits) for all m

outputs

Find the best order among the m orders by

using the Adaptive Order Selection module

Display the predicted value being

obtained from the Adaptive Order
Selection module

End

Fig. 1. Flowchart of the proposed algorithm.

1. Voting Agent (AV): Aggregate the results by employing a voting

agent. This is a simple and yet efcient voting technique based
upon popularity that investigates whether there are two or more
forecasts with the same value or not. These voters must be H P 1
in order to attend the voting procedure. Having H P 1assures
that the corresponding voter to have found at least one matching
pattern in the historical data and to be ready to join the voting.
Those voters with H = 0 are not ready for voting because they
have failed to nd any solution or matched pattern within historical data. Mathematically speaking, the voting agent is looking for a solution with order of z (if such a solution exists)
^z y
^i ; i z; i; z 1; 2; . . . ; m; Hy^s > 0 and
where 9z; 9i y
Hy^i > 0, where z is the desired order (which is found by auto^i is
matic order selection), m is the maximum allowed order, y

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

Forecast one period ahead

using 1st order up to m-th order
respectively and store each
forecasted value along with its s 2
(variance) and H (hits)
information

Voting Agent (AVG)

Choose the
predicted result
with order z

Yes

Is aggregation possible for

order z?

No

Yes

Does exist a predicted result z

in which sz2=0 and Hz>1 (Hits)

No

Yes

Statistical Agent (ASA)

(Phase 1)

Statistical Agent (ASA)

(Phase 2)

Does exist an output z in which

s 2z < s 2i and
Hz>Hi (i=1,2,...m and I ? z)

No
Emotional Agent (AEM)

Choose the i th order as the

optimal order

Use the output as best answer

Fig. 2. Flowchart of the adaptive order selection module.

the predicted result by using ith-order, and Hy^i is the number of

^i . If such a solution exists, order z is
hits for predicted result y
selected. If such an aggregation could not be accomplished, the
next agent (statistical agent) will seek the best order.
2. Statistical Agent (AS): Analyse the results by employing a statistical analytic agent. This analysis is carried out in two stages.
The rst phase tries to nd the answer with variance r2 = 0 and
the number of hits H P 1. The idea behind this is to seek an
answer with no dispersion while ensuring that the predicted
result has already been repeated earlier in the historical data.
H = 0 is not desirable because it means the predicted result is

simply a repetition of the previous step (see Step 4 and Denition 3) and these answers are not usually good choices. H = 1 is
desirable because it means the predicted result has already
occurred in the historical data once and the next step is likely
to be the same as what has happened in the past. Therefore,
the rst stage seeks an order z s.t. 9z r2z 0; Hz > 0;
z 1; 2; . . . ; m. If the rst phase fails to nd the appropriate
order, the second phase tries to nd the predicted result with
smallest variance and largest H. Therefore an order z is desirable
here where 9z; 8i r2z < r2i ; Hz > Hi ; Hz ; Hi > 0; i; z 1; 2;
. . . ; m. The answer with greater H and lesser r2 is the answer

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

which is several times repeated in historical data with less dispersion which implies the higher order or the greater H is
always chosen. If these two phases both failed to nd the best
order, the next agent (emotional agent) will choose the best
order.
3. Emotional Agent (AE): Decide about the order by using the
emotional agent. The two aforementioned methods use rational
agents and when rationality cannot nd a solution, emotions
should be utilised, just like the human decision making process.
This technique can be also regarded as integration of human/
expert knowledge to an expert system; however, since this
information comes from the hunches of the FTS users, this is
an emotional signal (further information is available in Sections
4.3.34.3.5). Therefore, integration of human knowledge or
hunches according to the previous experiences is called emotional signal (Antoine Bechara, 2005). According to Bechara et
al. the right combination of rationality and emotion yields
advantageous decision making (Antoine Bechara, 2005). To do
an advantageous decision making, the emotional decision making agent chooses the ith-order of FTS where i is varied based
upon the dataset which the FTS is used for. In our study i is
three for FOREX application. Investigations by Li and Cheng
(2008) and our observations show that three (3) is an appropriate order for nancial data prediction. Therefore this experience
is formulated as an emotional signal in the function of the nal
issue in the decision making procedure. Consequently, if the
two previous agents fail to nd the best order, hunches of the
FTS users in the role of an emotional signal choose the best or
the ith-order (3rd order on FOREX historical data). For other
applications, the hunches of FTS users on the best order should
be learnt and replaced with i.
4.3. Introduction to the techniques used in adaptive order selection
module
To nd the best order, three different agents are employed. Each
agent is an approach to the problem solving and tries to nd the
optimal solution. To introduce why these agents were chosen,
the following subsections include necessary information about
each agent and the corresponding technique it uses.

4.3.1. Introduction to voting technique

When number of the choices is increased, decision making becomes complicated. Voting is an intuitive approach to aggregate
different choices. Lang in 2004 and 2005 and Chevaleyre et al. in
2006 have discussed different voting methods that are mostly
computationally hard algorithms (NP problems). Chevaleyre et al.
surveyed a number of voting techniques in their paper (Chevaleyre,
2006) and we have investigated those techniques for problem of
aggregation in the adaptive order selection module. Thereafter, a
simplied and problem-oriented voting technique based upon
popularity is proposed. Choosing the popularity and simplifying
it, is because of continuous nature of voting in the adaptive order
selection; as a result, no NP-complete voting algorithm is appropriate and a simple yet efcient aggregation as presented in Section
4.2 is suited to the problem we addressed. Time complexity of
the proposed voting technique is O(n2), where n is the number of
voters.

4.3.2. Introduction to statistical analyst

Variance gives the necessary information on dispersion of data
causing uncertainty and inconsistency in decision making process.
H (hits) demonstrates the number of successful matched patterns
in the historical data; thus, by increasing the H, uncertainty is decreased. In addition, decrement of dispersion is desired to increase
consistency of the outputs.

4.3.3. Introduction and roles of emotions in human decision making

process
According to the experience of the neurologists (Bechara &
Damasio, 2005), human with a lesion in amygdala (the section of
brain that is responsible for emotion) could not perform advantageous decision making. In a playing card scenario, people with
emotional problems were unable to make the best decisions during
gambling play (Bechara & Damasio, 2005). Thus emotion plays a
key role in decision making process and it cannot be separated
from rationality. On the other hand, relying too much on emotion
in decision making processes can yield inferior nal results. As a
result, an appropriate decision making could be one that nds a
balance between emotion and rationality.

Table 4
Time complexity comparison.
Time complexity
The Proposed Approach

OProposedApproach Ok  n m2 p2 m2 
where k is the number of training epochs for SOM, p is the number of training data, n is the number of intervals, and mis the maximum order chosen by user (the prediction is carried out from 1st order up to mth-order)

High-order method (Chen, 2002)

OHFTS On  p k  p2 k  p
where n is the number of intervals, p is the total number of training data, and k is the order of the FTS

FTS and Genetic Algorithm (Chen &

Chung, 2006)

OFTSGA Op2 G  I  q2 
where p is the total number of training data, G is the number of generations, I is the number of individuals and q is the number of
training data are used in genetic algorithm (usually q < p to speed up the process of partitioning)

Table 5
MSE error rates (average error rates along with its SDa).
The proposed method

USD/EUR
USD/GBP
EUR/GBP
a

High-order method (Chen, 2002)

GA-FTS and Genetic Algorithm (Chen & Chung, 2006)

Mean

SDa

Mean

SDa

Mean

SDa

1.1042e005
7.1063e005
8.6845e005

4.2306e004
5.6123e006
1.9308e005

2.1757e004
1.5131e004
4.7017e004

1.7702e004
6.2356e005
2.5174e004

0.0011
9.4688e005
2.2954e004

3.4695e004
2.2318e005
8.1593e005

Standard deviation.

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

4.3.4. Function of emotions in nancial decision making process

In economy and nancial managements gut-feeling and
hunches plays a key role in decision making process (Bechara
& Damasio, 2005). These emotional feelings are obtained from
an individuals earlier experiences and are important due the
fact that they convey the personal aspects of an individuals
experiences which may not be enumerable. In economy and
nancial managements, experience has shown to play a key role
to success. Therefore, it seems reasonable to augment them in an
AI-based system to reach a more prudent decision making
process.

the most time consuming term in a polynomial time complexity

expression. Therefore we would have:

4.4. Time complexity consideration

Accuracy rate is not only the key to compare algorithms; however, time complexity is also signicant. In this paper, the time
complexity for the proposed approach is derived and compared
with GA-FTS and Chens high-order method. Section 4.1.1 discusses
the time complexity of the proposed approach. Proofs for other
methods are available in Appendix A. Section 4.4.2 compares different time complexity results.
4.4.1. Time complexity of the proposed approach
The proposed approach consists of three main parts. The rst is
to partition the universe of discourse into unequal intervals, the
second is to make the prediction and the third is to select the best
order adaptively. Therefore, the time complexity is:

OProposedApproach OClustering OPrediction OAutomaticOrderSelection

OClustering can be computed by the bellow formula:

OClustering Ok  1 n n N BMU 
where k is the number of training epochs, n is the number of intervals, and NBMU is the maximum number of neighbours for best
matching. SOM and its method of clustering is described in Section
3.
Time complexity of making predictions is as follow:

"
OPrediction O p  n

m
X

j

j1

p
X

!
i p

m
X

!#
j

j1

i1

where p is the number of training data being used in FTS prediction, mis the maximum order was chosen by the user (the prediction is accomplished from 1st order up to mth-order).
n) is
P (p 
Pp 
m
the time complexity of fuzzifying historical data.
j1 j 
i1 i
is
time complexity of making m fuzzy relationships and
 the
Pm 
p  j1 j is the time complexity of making prediction from
the derived fuzzy relationships (the time complexity for prediction
of rst-order is (p) for second-order is (2  p) and for having m
prediction
from rst-order up to mth-order, the time complexity

P 
is p  m
j1 j ).
The time complexity of adaptive order selection is:

"
OAutomaticOrderSelection O

m
X
i

!
i m

m
X

j 1

where m is the maximum order was chosen by user

prediction
P(the
m
is accomplished from 1st order up to mth-order),
i i is the time
complexity of voting,
Pm is the time complexity of rst phase of
m
statistical analysis,
j j is the time complexity of second phase
of statistical analysis and 1 is the constant order of emotional decision making process.
According to the computation complexity techniques (Neapolitan & Naimipour, 2004) in calculating the big O, we should choose

Fig. 3. (a)(c) One of the predicted signals for each currency-pair. The proposed
method has been compared with high-order method (Chen, 2002) and FTS with
genetic algorithm (Chen & Chung, 2006).

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

OClustering Ok  n

OPrediction O

m
X

j

j1

p
X

!
i

i1

The number of rows in dataset is 670, from these 670 rows of

data 450 consecutive rows are randomly-selected for training
and 10 randomly-selected rows are selected for testing. Since repetition of the same test yields different error value, the test is repeated 10 times and the average error along with its standard
deviation using MSE and MAPE keys are reported in Tables 4,5. This
number of testing and training data is common for nancial data
prediction (Li & Cheng, 2007). Fig. 3 illustrates one of these tests
per ach currency-pair. MAPE and MSE are computed by using
Eqs. (7) and (8).


m  m 1 p  p 1

O
2
2

Om2 p2

OAutomaticOrderSelection O

m
X
i

m
X

!
j


m  m 1
O 2
2

Om2
As a result, the total time complexity of the proposed approach is:

OProposedApproach Ok  n m2 p2 m2 

where k is the training epochs for SOM, p is the number of training

data, n is the number of intervals and m is the maximum order was
chosen by user (the prediction is carried out from rst-order up to
mth-order).
4.4.2. Time complexity comparison
Time complexity of the proposed approach is compared with
Chens high-order method (Chen, 2002) and FTS with genetic algorithm (Chen & Chung, 2006). Table 4 reports the time complexities.
By comparing the results in Table 4, it can be seen that the approaches are functions of different things. The time complexities
can be compared by considering the most time consuming terms.
The most time consuming part of the proposed approach is
(m2p2); therefore it is an exponential term which is power of 4.
Chens high-order methods most time consuming term is
(k  p2) which is also exponential, power of 3. FTS with genetic
algorithms most time consuming term is (G  I  q2) which is
exponential power of 4.
We can conclude that the proposed approach is similar to GAFTS in terms of time complexity; however, both approaches are
computationally harder than Chens high-order method.
5. Experimental results
To compare the proposed approach with the previous studies
on FTS, a number of tests and comparisons are conducted on
FOREX daily dataset (FOREX quotes). The dataset is the real quotes
of currency-pairs in FOREX that are obtained from http://fx.sauder.ubc.ca/ (courtesy of the University of British Columbia, Sauder
School of Business). Three currency-pairs being USDEUR, USDGBP
and EURGBP are chosen and investigated.
The FTS setting we have chosen with respect to application in
FOREX is as follows:
Number of intervals (n) = 7, adaptive order selection is accomplished between rst up to fth-order (m = 5). For clustering data
by Neural Network Toolbox of Matlab the chosen parameters
are as follows: number of clusters: 7, topology: hexagon, distance:
Euclidian, ordering phase learning rate: 0.2, ordering phase steps:
100.

MAPE
MSE


n 

1X
Real Value  Forecated Value

n j1 
Real Value

n
1X
Forecated Value  Real Value2
n j1

To compare the proposed method, two previous studies are chosen.

The rst study uses high-order FTS but it partitions the universe of
discourse equally (Chen, 2002) and the second study partitions the
universe of discourse unequally using genetic algorithm (Chen &
Chung, 2006) but does not use higher orders of inputs. To the best
of the authors knowledge, there is no study that combines both
techniques; therefore the proposed method is compared with each
study separately and the numerical results are reported in Tables 5
and 6.

6. Conclusions and future works

Order selection is an important but often overlooked step of
identication. Conventional identication algorithms pre-assign
order based on analysis of physical laws, intuition or thru an
ad hoc procedure. While this may be adequate for systems that
maintain a general behaviour in time, or those whose behaviour
is generally identiable by analysis of physical laws, it becomes
a costly assumption for sufciently complex systems that
change their general behaviour in time. Identication of such
systems, such as nancial time series, requires a learning algorithm that adjusts not only its parameters but also its structure.
Another aspect that is often overlooked is appropriate partitioning of the decision space. Most learning techniques begin their
analysis by equally partitioning the decision space. However,
different parts of the decision space can require different grades
of granulation. In contrast to the earlier techniques, the proposed high-order fuzzy time series identication scheme utilises
an adaptive order selection scheme and partitions the universe
of discourse using self organising maps. This partitioning
scheme allows different granularity at different parts of decision
space based.
The proposed technique is then applied to prediction of FOREX
daily dataset. To compare performance, two earlier studies are also
applied to this time series data. Results indicate that the proposed
method surpasses the two earlier studies by providing more accurate prediction. The improvement in terms of precision is obtained
by using the SOM to partition the universe of discourse unequally

Table 6
MAPE error rates (Average error rates along with its SDa).
The proposed method

USD/EUR
USD/GBP
EUR/GBP
a

High-order method (Chen, 2002)

FTS and Genetic Algorithm (Chen & Chung, 2006)

Mean

SDa

Mean

SDa

Mean

SDa

0.0032
0.0083
0.0057

0.0103
0.0013
0.0035

0.0119
0.0154
0.0245

0.0041
0.0037
0.0078

0.0066
0.0115
0.0145

0.0078
0.0028
0.0028

Standard deviation.

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M. Bahrepour et al. / Expert Systems with Applications 38 (2011) 475485

and using the adaptive order selection to nd out the best order at
different times.
However, this hybrid algorithm also requires more computation. While this limitation is not severely hampering for the considered example, since decisions are made only on a daily basis
here, it can become a limiting factor when fast decision and adaptation is required. Future direction of this research is to reduce execution time by using more parallel agents. We also believe better
performance can be obtained by exploiting the uncertainty in the
information and the decision making process.
Appendix A
A.1. Time complexity of the FTS with genetic algorithm
The time complexity of the FTS with genetic algorithm (OFTSGA)
introduced in Chen and Chung (2006) is as follows:

OFTSGA OGeneticAlgorithm OPrediction

where OGeneticAlgorithm is the time complexity for partitioning the universe of discourse unequally using genetic algorithm and OPrediction
is the time complexity for fuzzifying data, deriving fuzzy relationships and predicting.
OGeneticAlgorithm can be obtained by the bellow formula:

OGeneticAlgorithm OG  IP c Pm OF y 1
where G is the number of generations, I is the number of individuals, Pc is the combination probability, Pm is mutation probability, OF y
is the time complexity of the tness function and 1 is the time complexity of selection being performed one time for each individual in
the each generation. Time complexity of OF y for the problem of partitioning the universe of discourse is:

"
OF y O n  q

q
X

i q

OF y O

i1


q q 1
Oq2
2

Therefore OGeneticAlgorithm is:

OGeneticAlgorithm OG  IP c Pm q2 1
Again we use the most time consuming term in the above polynomial to calculate big O in order to nd the time complexity of genetic algorithm in partitioning the universe of discourse unequally,
which is:

OGeneticAlgorithm OG  I  q2
The time complexity of OPrediction is:

"
OPrediction O n  p

p
X

!
i

i1



p  p 1
Op2
2

As a result, the time complexity of OFTSGA is:

OFTSGA Op2 G  I  q2 

where p is the total number of training data, G is the number of generations, I is the number of individuals and q is the number of training data are used in genetic algorithm (usually q < p to speed up the
process of partitioning).
A.2. Time complexity of Chens high-order method
The time complexity of Chens high-order model (OHFTS) which
is introduced in Chen (2002) is as follows:

"
OHFTS O n  p k

p
X

i k  p

i1

where n is the number of intervals, p is the total number of training

data and k is the order of the FTS. (n  p) is the complexity of fuzz P
ifying the data, k pi1 i is the complexity of deriving fuzzy relationships and (k  p) is the time complexity of nding the
appropriate fuzzy relationship and defuzzication.
By using the aforementioned techniques in calculating big O, we
have:

where n is the number of intervals, p is the total number of training

data and k is the order of the FTS.

where n is the number of intervals, q is number of training data are

used for nding the optimal interval length (q should be much
smaller that total training data or p to speed up the process of parP
titioning). (n  q) is the complexity of fuzzifying the data, qi1 i is
the time complexity of deriving fuzzy relationships and q is the time
complexity of nding the appropriate fuzzy relationship and
defuzzication.
According the computation complexity techniques (Neapolitan
& Naimipour, 2004) in calculating the big O, we should choose
the most time consuming term in a polynomial time complexity
expression. Therefore we would have:

OPrediction O

p
X

OHFTS On  p k  p2 k  p

i1

q
X

complexity of deriving fuzzy relationships and p is the time complexity of nding the appropriate fuzzy relationship and defuzzication.
To calculate the time complexity, the most time consuming
term should be chosen. Therefore we would have:

#
ip

i1

where n is the number of intervals, p is the total number of training

P
data. (n  p) is the complexity of fuzzifying the data, pi1 i is the

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