A Neural Network Approach Based on Agent to
Predict Stock Performance
Yanhua Shao1,2, Jianshi Li1
1. College of Computer Science & technology
Guizhou University
Guiyang, Guizhou Province, China
online-8j@163.com
AbstractPredicting stock performance is a very large and
profitable area of study. A large number of studies have been
reported in literature with reference to the use of artificial neural
network in modeling stock performance in western countries.
However, not much work along the approach to neural network
based on agent has been reported. This thesis focuses on the
development and the simulation of a stock market performance
model of utilizing a neural network approach base on agent. This
model is easy to understand, and can be easily implemented as a
software simulation. First we will discuss the basic concepts
behind this type of neural network based on agent, then, we'll get
into some of the more application ideas.
Keywords-artificial neural network; agent; environment-rules-
agents scheme; cross target method
I. INTRODUCTION
Because of their ability to deal with uncertain, fuzzy, or
insufficient data which fluctuate rapidly in very short periods
of time, neural networks have become very important method
for predictions [Ref. 1]. These include business forecasting,
credit scoring, bond rating, business failure prediction,
medicine, pattern recognition and image processing. A large
number of studies have been reported in literature with
reference to the use of ANN in modeling stock prices.
However, not much work along the approach to neural network
based on agent has been reported.
Stock market is a special example of complex economics
system [Ref. 2, 3, 4]. Conventional stock market model bases
on the assumption that the trader takes action rationally in
accordance with market. Stock market seems to be a dead
physical system on the premise of the model assumption.
However, the assumption is far away from the realistic stock
market, people often characterize stock market by the language
that express human psychology, such as stock market durative
downturn, crazy going up. Furthermore, phenomena like
bubbles and crashes can emerge as collective phenomena. We
will put emphasis on how to supersede agent with neural
network and how to use a neural network approach to the self-
development of consistency in agents' behavior in this paper.
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Feng Tian1, Tianjian Chen1, Jinrong wang1
2. College of Economics & Management
Guizhou University for Nationalities
Guiyang, Guizhou Province, China
sh_yh2002@163.com
II. NEURAL NETWORK
Neural networks, as structures very close, in econometric
terms, to nonlinear multidimensional regression functions:
y = f (B f (A.x)).
We can imagine a class of simple Artificial Neural
Networks (ANN), the multilayer feed forward network, as a
system of connections linking several processing units of the
kind shown in Fig. 1.
a0 wk0 1
n
wk1
a1
a w
s =0
s ks
0
an wkn
Fig. 1 a node or artificial neural
The processing element (PE) can be considered as an over
simplified sketch of a natural neuron, where the parameters wkj
represent the strength of the synapses. The aj values
(activations) are the inputs of the PE or neuron, which
calculates their weighted sum (this operation explains the use
of the conventional name weight to designate the parameters
of a function in the ANN jargon). The same operation, in
matrix algebra, is done by the product Ax, where the x vector
contains the aj activations and the matrix A the wkj parameters.
The PE produces an output applying a non linear
transformation to the weighted sum, as that shown in equation
(1), where k is the parameter that determines the closeness of
the function to a crude step function.
1
f (z) =
1 + e ikz (1)
Each row of A and B contains the weights of a PE. To find
the A and B values (i.e. the ANN parameters) we have to use a
numerical approximation with a simplified gradient method,
the socalled back propagation method [Ref. 5, 6] (which
comes from propagating back the error measures from the
output layer to the hidden one), starting with random
parameters and adapting the performances of the ANN function
1
on the basis of a set of training examples. Other methods also
exist, but the back propagation is used here for its simplicity
and robustness.
The process of parameter determination is also called
learning, because the quality of the result is obviously related
to the number of numerical iterations of the trial and errors
correction cycle upon the examples (patterns, always in the
ANN jargon). Generally a second set of examples, the
verification set, not used in the learning phase, which is instead
employed to check the performances of the ANN function.
III. MODEL OF STOCK MARKET
A. Model Structure
Swarm is a natural candidate to this kind of structures, but
we need some degree of standardization, mainly when we go
from simple models to complex results. For this reason, we
introduce here a general scheme-ERA (Environment-rules-
Agents) [Ref. 7, 8] that can be employed in building agent
based simulations, shown in Fig. 2.
ANN ANN ANN
Agent Rule-Master Rule-Maker
Random
Environment
Agent
Random
Imitating Rule-Master
Agent
Fig. 2 model of stock market
The main value of the ERA scheme is that it keeps both the
environment, which models the context by means of rules and
general data, and the agents, with their private data, at different
conceptual levels. Another advantage of using the ERA
structure is its modularity.
In this model, agent behavior is determined by external
objects, named RuleMasters, which can be interpreted as
abstract representations of the cognition of the agent. rule
Masters obtain the information necessary to apply rules from
the agents themselves or from special agents charged with the
task of collecting and distributing data, therefore master agent
behavior (for example, applying rules generated from Rule
Maker to DataVerificationMatrix produce forecast), which can
be interpreted as abstract representations of the cognition of the
agent.
The Rule Master objects are linked to Rule Maker objects,
whose role is to modify the rules mastering agent behavior (for
example, Rule Maker modifies the weight of neural network by
training DataTrainingMatrix, accordingly learn, modify and
generate rule). Similarly, information necessary to the Rule
Makers come from the Rule Masters. A Rule Maker may be
"used" by several Rule Masters, for instance to apply the
results of a learning process.
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B. CT Scheme
In our model, there is a type of artificial neural network
agent: i.e. BP-CT ANN agent, which not only forecast price by
using BP algorithm, but also generate target that vary
continuously by using CT (CrossTarget) scheme [Ref. 7, 8].
The name crosstarget comes from the technique used to
figure out the targets necessary to train the ANN representing
the artificial adaptive agents (AAAs) that populate our
experiment. The characteristic of CT: the output of agent has
been split into actions and effects. Both the targets necessary to
train the network from the point of view of the actions and
those connected with the effects are built in a crossed way.
Targets in learning process are: (I) on one side, the actual
effects-measured through accounting rules-of the actions made
by the simulated subject; (II) on the other side, the actions
needed to match guessed effects.
Fig. 3 describes an AAA (Artificial Adaptive Agent)
learning and behaving in a CT scheme. The AAA has to
produce guesses about its own actions and related effects on
the basis of an information set (the input elements are I1, ,
Ik), such as the data exit in the initial file.
Environment
Action Effects (Actual) Targets
Requested Action to Match
Action Effects (Guess) Action (Guess)
E1 E2 Em A1 A2 An Output
Hidden
I1 I2 Ik Input
Fig. 3 CT Scheme
The acting and learning algorithm of CT: first of all, we
introduce a generic effect E1 arising from two actions, named
A1 and A2. The target for the effect is:
E 1 = f ( A1 , A2 ) (2)
Where f (*) is a definition, linking actions to effects on an
accounting basis.
Our aim here is to obtain an output E1 (the guess made by
the network) closer to E1 , which is the correct measure of the
effect of actions A1 and A2. The error related to E1 is:
1
e= ( E1 E 1 ) 2
e = E1 E1 or 2
2
 To minimize the error, we back propagate it through
network weights.
Our aim is now to find the actions, as outputs of our
network, more consistent with the outputs produced by the
effect side. So we have to correct A1 and A2 to made them
closer to A1 and A2 , which are actions consistent with the output
E1. We cannot figure out the targets for A1 and A2 separately.
From (2) we have:
A1 = g 1 ( E1 , A2 )
(3)
A2 = g 2 ( E1 , A1 )
(4)
Choosing a random value 1 from a random uniform
distribution whose support is the closed interval [0, 1] and
setting 2 =1- 1 , from (3) and (4) we obtain:
A1 = g 1 ( E 1 e 1 , A2 )
(5)
A 2 = g 2 ( E 1 e 2 , A1 )
(6)
Functions g1 and g2, being obtained from definitions that
link actions to effects mainly on an accounting basis, usually
have linear specifications. The errors to be minimized are:
a1 = A1 A1
a 2 = A 2 A2
When the actions determine multiple effects, they are
included in multiple definitions of effects. So, those actions
will be affected by several corrections, only the largest absolute
value is chosen.
Building agent using CT method, beyond generating
internal consistency (IC), agents can develop other
characteristics, for example the capability of adopting actions
(following external proposals, EP) or evaluations of effects
(following external objectives, EO) suggested from the
environment (for example, following rules) or from other
agents (for examples, imitating them).
This model have two outputs of effects: WealthQuantit\,
shareQuantity; one output of action: buySellp.
IV. SIMULATION E XPERIMENT
A. The design of the Experiment structure
There are four types of agents: BP ANN agent, which
forecast price by using Back Propagation (BP) algorithm; BP-
CT ANN agent, which not only forecast price by using BP
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algorithm, but also generate target that vary continuously;
Random agent, which choose price and act (buy or sell)
randomly; Imitating agent, which choose action by imitating
(based on the price of market or the last N agents action).
ANN agent has the structure of experiment with three feed
forward layers as follows:
The number of node in input layer is seven: meanprice5, the
mean price of the t-5 (t is today) day; meanprice4, meanprice3,
meanprice2, meanprice1, the mean price of the t-4, t-3, t-2, t-1
day successively. WealthQuantity0: the wealth of the previous
day. ShareQuantity0: the share of the stock of the previous day.
Neural network design (once the input variables have been
selected) follows a number of stages:
Select an initial configuration (typically, one hidden
layer with the number of hidden units set to half the
sum of the number of input and output units).
Iteratively conduct a number of experiments with each
configuration, retaining the best network (in terms of
selection error) found. A number of experiments are
required with each configuration to avoid being fooled
if training locates a local minimum, and it is also best
to resample.
On each experiment, if under-learning occurs (the
network doesn't achieve an acceptable performance
level) try adding more neurons to the hidden layer(s).
If this doesn't help, try adding an extra hidden layer.
If over-learning occurs (selection error starts to rise)
try removing hidden units (and possibly layers).
Once have experimentally determined an effective
configuration for networks, resample and generate new
networks with that configuration.
According with above approach, the number of node in
hidden layer is five;
The number of node in output layer is three:
WealthQuantity, the predict wealth of today; ShareQuantity,
the predict share of stock of today; BuySellp, the predict price
of stock of today.
B. The Result of the Simulation experiment
Simple hypothesis: two hundred agents were distributed all
over the market, 30 percent of the agents are BP ANN agents,
10 percent of the agents are BP-CT ANN agents, 30 percent of
the agents are Random agents, 30 percent of the agents are
Imitating agents (MarketImitating agent and LocallyImitating
agent are 20 percent and 10 percent respectively).
Others parameters are: agentProbToAct =0.15; alpha =0.8;
BuySellproImit = 0.4; maxOrderNumber = 2; eps = 0.6;
probOfLocallmition =0.3; localHistoryLength =15;
weightRange =0.3; patternNumberInVerificationSet = -1;
patternNumberInTrainingSet = -1;
epochNumberInEachTrainingCycle = 1.
3
 Fig. 4 and 5 reflect the shifty trend of the price and the
number of orders with time elapsing respectively.
Fig. 4 the time sequence of the price
This experiment generates increasing and decreasing price
sequences with relevant volatility. Moreover, the experiment
reproduces some exceptional phenomena as a consequence of
the rules of the market, such as bubbles, crashes and volatility
congregation.
Fig. 5 the time sequence of the orders
With the interaction of heterogeneous agents and structured
environments or markets, we use the cross targets technique to
train artificial neural networks to develop minimal behavioral
rules. Moreover, generated sequences of prices linked to the
agents actions in nonlinear ways. Therefore, the experiment
satisfies to understand the dynamic specialty of stock market
fully.
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V. CONCLUSION
Artificial Neural Networks offer qualitative methods for
business and economic systems that traditional quantitative
tools in statistics and econometrics cannot quantify due to the
complexity in translating the systems into precise mathematical
functions. Under normal conditions, in most cases, a good
neural network will outperform most other current stock
market predictors and be a very worthwhile. In this paper, we
have presented some preliminary results of the simulations
with an artificial stock market. The main conclusions are that
information plays a crucial role in the way the market behaves.
The second main conclusion is that only when introducing
heterogeneity amongst the agents, does the model generate a
market dynamics which exhibits similar characteristics as real
world stock markets.
ACKNOWLEDGMENT
This paper is supported by the College of Computer
Science and Technology of the Guizhou University, College of
Economics and Management of the Guizhou University for
Nationalities.
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