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    Stock Price Prediction Using The ARIMA Model

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    Aman Kedia
    This document presents a study that uses ARIMA models to predict stock prices. It describes the process of building an ARIMA model for predicting prices of stocks from the National Stock Exchange of India. The methodology section outlines the steps taken, which include identifying the best ARIMA model using criteria like BIC and adjusted R-squared. Results show that the optimal ARIMA model achieved satisfactory short-term predictions for the stock prices tested. The conclusion is that ARIMA models demonstrate potential for assisting investors with short-term decision making.

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    Stock Price Prediction Using The ARIMA Model

    Uploaded by

    Aman Kedia
    61 views7 pages
    This document presents a study that uses ARIMA models to predict stock prices. It describes the process of building an ARIMA model for predicting prices of stocks from the National Stock Exchange of India. The methodology section outlines the steps taken, which include identifying the best ARIMA model using criteria like BIC and adjusted R-squared. Results show that the optimal ARIMA model achieved satisfactory short-term predictions for the stock prices tested. The conclusion is that ARIMA models demonstrate potential for assisting investors with short-term decision making.

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    Stock Price Prediction Using the ARIMA Model

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    This document presents a study that uses ARIMA models to predict stock prices. It describes the process of building an ARIMA model for predicting prices of stocks from the National Stock Exchange of India. The methodology section outlines the steps taken, which include identifying the best ARIMA model using criteria like BIC and adjusted R-squared. Results show that the optimal ARIMA model achieved satisfactory short-term predictions for the stock prices tested. The conclusion is that ARIMA models demonstrate potential for assisting investors with short-term decision making.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    61 views7 pages

    Stock Price Prediction Using The ARIMA Model

    Uploaded by

    Aman Kedia
    This document presents a study that uses ARIMA models to predict stock prices. It describes the process of building an ARIMA model for predicting prices of stocks from the National Stock Exchange of India. The methodology section outlines the steps taken, which include identifying the best ARIMA model using criteria like BIC and adjusted R-squared. Results show that the optimal ARIMA model achieved satisfactory short-term predictions for the stock prices tested. The conclusion is that ARIMA models demonstrate potential for assisting investors with short-term decision making.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 7

    Stock Price Prediction Using the ARIMA Model

    Abstract— Stock price prediction is an important topic in finance and economics which has
    spurred the interest of researchers over the years to develop better predictive models. The
    autoregressive integrated moving average (ARIMA) models have been explored in literature for
    time series prediction. This paper presents extensive process of building stock price predictive
    model using the ARIMA model. Published stock data obtained from National Stock Exchange
    (NSE) are used with stock price predictive model developed. Results obtained revealed that the
    ARIMA model has a strong potential for short-term prediction and can compete favourably
    with existing techniques for stock price prediction.

    I. INTRODUCTION

    Researchers are continually driven by the fascination of prediction, pushing them to enhance existing
    models. The impact of these models on institutions and individuals, aiding investment decisions and
    strategic planning, motivates the pursuit of better predictive methods. Predicting stock prices remains
    a challenging task in financial forecasting due to the complex nature of the stock market. Investors
    actively seek reliable forecasting approaches to ensure profitability and minimize risks, prompting
    ongoing innovation and the development of new predictive models.

    Over the years, diverse models and techniques, including artificial neural networks (ANNs), have
    been devised for stock price prediction. ANNs are particularly favored for their ability to learn
    patterns from data and deduce solutions from unknown information. Previous research has integrated
    ANNs into stock price prediction, referencing their effectiveness. Recently, hybrid approaches have
    emerged, combining the strengths of different models to enhance predictive accuracy. While ANNs
    belong to the realm of artificial intelligence, ARIMA models fall within the statistical models
    category.

    ARIMA models are recognized for their statistical robustness and efficiency in short-term financial
    time series forecasting, often outperforming popular ANN techniques. They have found extensive
    application in economics and finance, alongside other statistical models like regression methods,
    exponential smoothing, and generalized autoregressive conditional heteroskedasticity (GARCH).

    This paper delves into the comprehensive process of constructing ARIMA models for short-term stock
    price prediction. Real-life data results showcase the substantial potential of ARIMA models in
    providing short-term predictions that can guide investment decision-making. The subsequent sections
    offer an overview of ARIMA models, detail the methodology employed, present experimental results,
    and conclude the paper.

    II. ARIMA MODEL

    The ARIMA model, introduced by Box and Jenkins in 1970 and commonly referred to as the Box-
    Jenkins methodology, is a systematic approach involving a series of steps for identifying, estimating,
    and diagnosing ARIMA models based on time series data. Widely acclaimed as one of the leading
    methods in financial forecasting, ARIMA models have demonstrated their efficiency in generating
    short-term forecasts, consistently outperforming complex structural models in scenarios requiring
    short-term predictions. In the ARIMA model, the future value of a variable is expressed as a linear
    combination of past values and past errors, represented by equation (1):

    Yt=ϕ1Yt−1+ϕ2Yt−2+…+ϕpYt−p+ϵt−θ1ϵt−1−θ2ϵt−2−…−θqϵt−q

    Constructing an ARIMA predictive model involves three fundamental steps: model identification,
    parameter estimation, and diagnostic checking.

    III. METHODOLOGY

    The comprehensive procedure utilized in this study to construct the ARIMA model for stock price
    forecasting is outlined in the following subsections. The implementation tool for this research was
    EViews software version 5. Historical daily stock prices from two different countries' stock exchanges
    were employed, comprising four elements: open price, low price, high price, and close price. In this
    investigation, the closing price was chosen to represent the index price for prediction, as it
    encompasses all the day's trading activities.

    To identify the most suitable ARIMA model among multiple experiments conducted, the following
    criteria were employed for stock index selection:

     Bayesian or Schwarz Information Criterion (BIC) exhibiting relatively small values.

     Standard error of regression (S.E. of regression) displaying relatively small values.

     Adjusted R2 demonstrating relatively high values.

     Q-statistics and correlogram indicating the absence of significant patterns in the


    autocorrelation functions (ACFs) and partial autocorrelation functions (PACFs) of the
    residuals, signifying that the residuals of the chosen model constitute white noise.
    The subsequent subsections delineate the step-by-step processes involved in the development of the
    ARIMA model.

    A. ARIMA (p, d, q) Model for ADANI POWER Stock Index


    ADANI POWER stock data used in this study covers the period from 28th Mar, 2023 to 2nd
    Jan, 2024 having a total number of 188 observations. Figure 1 depicts the original pattern of
    the series to have general overview whether the time series is stationary or not. From the
    graph below the time series have random walk pattern.

    Figure 1: Graphical representation of the ADANI POWER

    Figure 2 is the correlogram of ADANI POWER time series. From the graph, the ACF dies down
    extremely slowly which simply means that the time series is nonstationary. If the series is not
    stationary, it is converted to a stationary series by differencing. After the first difference, the
    series “ADJCLOSE” of ADANI POWER becomes stationary as shown in figure 3 of the
    correlogram.
    Figure 2: The correlogram of ADANI POWER

    Figure 3: The correlogram of ADANI POWER after first differencing


    In figure 4 the model checking was done with Augmented Dickey Fuller (ADF) unit root test on
    “d_AdjClose” of ADANI POWER. The result confirms that the series becomes stationary after the first-
    difference of the series.

    Figure 4: ADF unit root test for ADJCLOSE of ADANI POWER stock inde

    Figure 5: Correlogram of ADANI POWER to determine the autoregressive (p) and moving average (q)
    ARIMA Schwarz criterion Adjusted R-squared R-squared
    (2,1,1) 925.815 0.982315 0.982587
    (2,1,2) 926.8656 0.983094 0.983484
    (2,1,3) 931.7407 0.98296 0.983484
    (3,1,1) 930.6139 0.982185 0.982597
    (3,1,2) 931.7407 0.98296 0.983484
    (3,1,3) 935.9086 0.98292 0.983577
    TABLE:1

    ARIMA (2,1,1) is considered the best for ADANI POWER as shown in TABLE 1. The model returned the
    smallest Bayesian or Schwarz information criterion of 925.815.

    IV. RESULTS AND DISCUSSION


    The experimental results of each of stock index are discussed in the subsection below.
    Result of ARIMA Model for ADANI POWER Price Prediction
    The result of the predicted values of ARIMA (2,1,1) considered the best model for ADANI POWER.
    Figure 6 gives graphical illustration of the level accuracy of the predicted price against actual stock
    price to see the performance of the ARIMA model selected. From the graph, is obvious that the
    performance is satisfactory.

    Figure:6 Actual vs predicted price


    Figure:7 Statistical data of the remaining 30% of data

    V. CONCLUSION

    This paper extensively details the process of constructing an ARIMA model for predicting stock
    prices. The experimental outcomes derived from the optimal ARIMA model underscore the capability
    of ARIMA models to provide satisfactory short-term stock price predictions. Such findings have the
    potential to assist investors in making profitable decisions in the stock market. Based on the results
    obtained, it is evident that ARIMA models can reasonably compete with emerging forecasting
    techniques in the realm of short-term predictions.

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