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A special issue of Journal of Risk and Financial Management (ISSN 1911-8074). This special issue belongs to the section "Financial Technology and Innovation".

Deadline for manuscript submissions: closed (31 December 2020) | Viewed by 72384

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Prof. Dr. Shigeyuki Hamori

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Guest Editor

Graduate School of Economics, Kobe University, Rokkodai, Nada-Ku, Kobe 657-8504, Japan
Interests: applied time series analysis; empirical finance; data science; international financeapplied time series analysis; international finance
Special Issues, Collections and Topics in MDPI journals

Prof. Dr. Tetsuya Takiguchi

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Guest Editor

Graduate School of System Informatics, Kobe University 1-1, Rokkodai, Nada-Ku, Kobe 657-8501, Japan
Interests: signal processing, machine learning, pattern recognition, statistical modeling

Special Issue Information

Dear Colleagues,

Artificial intelligence (AI) is regarded as the science and technology for producing an intelligent machine, particularly, an intelligent computer program. Machine learning is an approach to realize AI and is a collection of statistical algorithms. Because of the rapid development of computer technology, machine learning has been actively explored for a variety of academic and practical purposes in financial markets. This Special Issue focuses on the broad topic of “AI and Financial Markets” and includes novel research associated with this topic. Articles on the application of AI to financial markets are welcome.

The Special Issue could include contributions on the application of AI to asset return forecasting, volatility forecasting, portfolio allocation, market risk, credit analysis, and so on.

Prof. Dr. Shigeyuki Hamori
Prof. Dr. Tetsuya Takiguchi
Guest Editors

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All submissions that pass pre-check are peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Journal of Risk and Financial Management is an international peer-reviewed open access monthly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 1400 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Keywords

Artificial intelligence (AI)
Machine learning
Supervised learning
Unsupervised learning
Reinforcement learning
Regression
Classification
Deep learning
Asset return forecasting
Volatility forecasting
Portfolio allocation
Market risk
High-frequency trading

Related Special Issue

Empirical Finance Research in Journal of Risk and Financial Management (27 articles)

Published Papers (14 papers)

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Research

Jump to: Other

21 pages, 860 KiB

Open AccessArticle

Simulating Multi-Asset Classes Prices Using Wasserstein Generative Adversarial Network: A Study of Stocks, Futures and Cryptocurrency

by Feng Han, Xiaojuan Ma and Jiheng Zhang

J. Risk Financial Manag. 2022, 15(1), 26; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15010026 - 10 Jan 2022

Cited by 1 | Viewed by 2588

Abstract

Financial data are expensive and highly sensitive with limited access. We aim to generate abundant datasets given the original prices while preserving the original statistical features. We introduce the Wasserstein Generative Adversarial Network with Gradient Penalty (WGAN-GP) into the field of the stock market, futures market and cryptocurrency market. We train our model on various datasets, including the Hong Kong stock market, Hang Seng Index Composite stocks, precious metal futures contracts listed on the Chicago Mercantile Exchange and Japan Exchange Group, and cryptocurrency spots and perpetual contracts on Binance at various minute-level intervals. We quantify the difference of generated results (836,280 data points) and original data by MAE, MSE, RMSE and K-S distances. Results show that WGAN-GP can simulate assets prices and show the potential of a market simulator for trading analysis. We might be the first to look into multi-asset classes in a systematic approach with minute intervals across stocks, futures and cryptocurrency markets. We also contribute to quantitative analysis methodology for generated and original price data quality. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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18 pages, 1344 KiB

Open AccessArticle

New Dataset for Forecasting Realized Volatility: Is the Tokyo Stock Exchange Co-Location Dataset Helpful for Expansion of the Heterogeneous Autoregressive Model in the Japanese Stock Market?

by Takuo Higashide, Katsuyuki Tanaka, Takuji Kinkyo and Shigeyuki Hamori

J. Risk Financial Manag. 2021, 14(5), 215; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14050215 - 10 May 2021

Cited by 3 | Viewed by 2897

Abstract

This study analyzes the importance of the Tokyo Stock Exchange Co-Location dataset (TSE Co-Location dataset) to forecast the realized volatility (RV) of Tokyo stock price index futures. The heterogeneous autoregressive (HAR) model is a popular linear regression model used to forecast RV. This study expands the HAR model using the TSE Co-Location dataset, stock full-board dataset and market volume dataset based on the random forest method, which is a popular machine learning algorithm and a nonlinear model. The TSE Co-Location dataset is a new dataset. This is the only information that shows the transaction status of high-frequency traders. In contrast, the stock full-board dataset shows the status of buying and selling dominance. The market volume dataset is used as a proxy for liquidity and is recognized as important information in finance. To the best of our knowledge, this study is the first to use the TSE co-location dataset. The experimental results show that our model yields a higher forecast out-of-sample accuracy of RV than the HAR model. Moreover, we find that the TSE Co-Location dataset has become more important in recent years, along with the increasing importance of high-frequency trading. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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20 pages, 340 KiB

Open AccessArticle

ESG Disclosures and Stock Price Crash Risk

by Rio Murata and Shigeyuki Hamori

J. Risk Financial Manag. 2021, 14(2), 70; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14020070 - 07 Feb 2021

Cited by 31 | Viewed by 9361

Abstract

In this study, we investigate the relationship between environmental, social, and governance (ESG) disclosures and stock price crash risk. A stock price crash is a dreadful event for market participants. Thus, exploring stock price crash determinants is helpful for investment decisions and risk management. In this study, we use samples of major market index components in Europe, the United States, and Japan to perform regression analyses, after controlling for other potential stock price crash determinants. We estimate static two-way fixed-effect models and dynamic GMM models. We find that coefficients of firm-level ESG disclosures are not statistically significant in the static model. ESG disclosure coefficients in the dynamic model are not statistically significant in the U.S. market sample. On the other hand, coefficients of ESG disclosure scores in the dynamic model are statistically significant and negative in the European and Japanese marker sample. Our findings suggest that ESG disclosures lower future stock price crash risk; however, the effect and predictive power of ESG disclosures differ among regions. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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12 pages, 648 KiB

Open AccessArticle

Latent Segmentation of Stock Trading Strategies Using Multi-Modal Imitation Learning

by Iwao Maeda, David deGraw, Michiharu Kitano, Hiroyasu Matsushima, Kiyoshi Izumi, Hiroki Sakaji and Atsuo Kato

J. Risk Financial Manag. 2020, 13(11), 250; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm13110250 - 23 Oct 2020

Cited by 1 | Viewed by 2450

Abstract

While exchanges and regulators are able to observe and analyze the individual behavior of financial market participants through access to labeled data, this information is not accessible by other market participants nor by the general public. A key question, then, is whether it is possible to model individual market participants’ behaviors through observation of publicly available unlabeled market data alone. Several methods have been suggested in the literature using classification methods based on summary trading statistics, as well as using inverse reinforcement learning methods to infer the reward function underlying trader behavior. Our primary contribution is to propose an alternative neural network based multi-modal imitation learning model which performs latent segmentation of stock trading strategies. As a result that the segmentation in the latent space is optimized according to individual reward functions underlying the order submission behaviors across each segment, our results provide interpretable classifications and accurate predictions that outperform other methods in major classification indicators as verified on historical orderbook data from January 2018 to August 2019 obtained from the Tokyo Stock Exchange. By further analyzing the behavior of various trader segments, we confirmed that our proposed segments behaves in line with real-market investor sentiments. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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21 pages, 9432 KiB

Open AccessArticle

Autoencoder-Based Three-Factor Model for the Yield Curve of Japanese Government Bonds and a Trading Strategy

by Yoshiyuki Suimon, Hiroki Sakaji, Kiyoshi Izumi and Hiroyasu Matsushima

J. Risk Financial Manag. 2020, 13(4), 82; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm13040082 - 23 Apr 2020

Cited by 7 | Viewed by 5218

Abstract

Interest rates are representative indicators that reflect the degree of economic activity. The yield curve, which combines government bond interest rates by maturity, fluctuates to reflect various macroeconomic factors. Central bank monetary policy is one of the significant factors influencing interest rate markets. Generally, when the economy slows down, the central bank tries to stimulate the economy by lowering the policy rate to establish an environment in which companies and individuals can easily raise funds. In Japan, the shape of the yield curve has changed significantly in recent years following major changes in monetary policy. Therefore, an increasing need exists for a model that can flexibly respond to the various shapes of yield curves. In this research, we construct a three-factor model to represent the Japanese yield curve using the machine learning approach of an autoencoder. In addition, we focus on the model parameters of the intermediate layer of the neural network that constitute the autoencoder and confirm that the three automatically generated factors represent the “Level,” “Curvature,” and “Slope” of the yield curve. Furthermore, we develop a long–short strategy for Japanese government bonds by setting their valuation with the autoencoder, and we confirm good performance compared with the trend-follow investment strategy. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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18 pages, 1883 KiB

Open AccessArticle

Construction of Macroeconomic Uncertainty Indices for Financial Market Analysis Using a Supervised Topic Model

by Kyoto Yono, Hiroki Sakaji, Hiroyasu Matsushima, Takashi Shimada and Kiyoshi Izumi

J. Risk Financial Manag. 2020, 13(4), 79; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm13040079 - 19 Apr 2020

Cited by 7 | Viewed by 3409

Abstract

The uncertainty in the financial market, whether the US—China trade war will slow down the global economy or not, Federal Reserve Board (FRB) policy to increase the interest rates, or other similar macroeconomic events can have a crucial impact on the purchase or sale of financial assets. In this study, we aim to build a model for measuring the macroeconomic uncertainty based on the news text. Further, we proposed an extended topic model that uses not only news text data but also numeric data as a supervised signal for each news article. Subsequently, we used our proposed model to construct macroeconomic uncertainty indices. All these indices were similar to those observed in the historical macroeconomic events. The correlation was higher between the volatility of the market and uncertainty indices with larger expected supervised signal compared to uncertainty indices with the smaller expected supervised signal. We also applied the impulse response function to analyze the impact of the uncertainty indices on financial markets. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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12 pages, 415 KiB

Open AccessArticle

Contracts for Difference: A Reinforcement Learning Approach

by Nico Zengeler and Uwe Handmann

J. Risk Financial Manag. 2020, 13(4), 78; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm13040078 - 17 Apr 2020

Cited by 3 | Viewed by 4085

Abstract

We present a deep reinforcement learning framework for an automatic trading of contracts for difference (CfD) on indices at a high frequency. Our contribution proves that reinforcement learning agents with recurrent long short-term memory (LSTM) networks can learn from recent market history and outperform the market. Usually, these approaches depend on a low latency. In a real-world example, we show that an increased model size may compensate for a higher latency. As the noisy nature of economic trends complicates predictions, especially in speculative assets, our approach does not predict courses but instead uses a reinforcement learning agent to learn an overall lucrative trading policy. Therefore, we simulate a virtual market environment, based on historical trading data. Our environment provides a partially observable Markov decision process (POMDP) to reinforcement learners and allows the training of various strategies. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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20 pages, 876 KiB

Open AccessArticle

Impact Analysis of Financial Regulation on Multi-Asset Markets Using Artificial Market Simulations

by Masanori Hirano, Kiyoshi Izumi, Takashi Shimada, Hiroyasu Matsushima and Hiroki Sakaji

J. Risk Financial Manag. 2020, 13(4), 75; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm13040075 - 17 Apr 2020

Cited by 9 | Viewed by 3427

Abstract

In this study, we assessed the impact of capital adequacy ratio (CAR) regulation in the Basel regulatory framework. This regulation was established to make the banking network robust. However, a previous work argued that CAR regulation has a destabilization effect on financial markets. To assess impacts such as destabilizing effects, we conducted simulations of an artificial market, one of the computer simulations imitating real financial markets. In the simulation, we proposed and used a new model with continuous double auction markets, stylized trading agents, and two kinds of portfolio trading agents. Both portfolio trading agents had trading strategies incorporating Markowitz’s portfolio optimization. Additionally, one type of portfolio trading agent was under regulation. From the simulations, we found that portfolio optimization as each trader’s strategy stabilizes markets, and CAR regulation destabilizes markets in various aspects. These results show that CAR regulation can have negative effects on asset markets. As future work, we should confirm these effects empirically and consider how to balance between both positive and negative aspects of CAR regulation. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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17 pages, 1271 KiB

Open AccessArticle

Deep Reinforcement Learning in Agent Based Financial Market Simulation

by Iwao Maeda, David deGraw, Michiharu Kitano, Hiroyasu Matsushima, Hiroki Sakaji, Kiyoshi Izumi and Atsuo Kato

J. Risk Financial Manag. 2020, 13(4), 71; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm13040071 - 11 Apr 2020

Cited by 13 | Viewed by 6764

Abstract

Prediction of financial market data with deep learning models has achieved some level of recent success. However, historical financial data suffer from an unknowable state space, limited observations, and the inability to model the impact of your own actions on the market can often be prohibitive when trying to find investment strategies using deep reinforcement learning. One way to overcome these limitations is to augment real market data with agent based artificial market simulation. Artificial market simulations designed to reproduce realistic market features may be used to create unobserved market states, to model the impact of your own investment actions on the market itself, and train models with as much data as necessary. In this study we propose a framework for training deep reinforcement learning models in agent based artificial price-order-book simulations that yield non-trivial policies under diverse conditions with market impact. Our simulations confirm that the proposed deep reinforcement learning model with unique task-specific reward function was able to learn a robust investment strategy with an attractive risk-return profile. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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16 pages, 812 KiB

Open AccessArticle

The Predictability of the Exchange Rate When Combining Machine Learning and Fundamental Models

by Yuchen Zhang and Shigeyuki Hamori

J. Risk Financial Manag. 2020, 13(3), 48; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm13030048 - 04 Mar 2020

Cited by 20 | Viewed by 4856

Abstract

In 1983, Meese and Rogoff showed that traditional economic models developed since the 1970s do not perform better than the random walk in predicting out-of-sample exchange rates when using data obtained after the beginning of the floating rate system. Subsequently, whether traditional economical models can ever outperform the random walk in forecasting out-of-sample exchange rates has received scholarly attention. Recently, a combination of fundamental models with machine learning methodologies was found to outcompete the predictability of random walk (Amat et al. 2018). This paper focuses on combining modern machine learning methodologies with traditional economic models and examines whether such combinations can outperform the prediction performance of random walk without drift. More specifically, this paper applies the random forest, support vector machine, and neural network models to four fundamental theories (uncovered interest rate parity, purchase power parity, the monetary model, and the Taylor rule models). We performed a thorough robustness check using six government bonds with different maturities and four price indexes, which demonstrated the superior performance of fundamental models combined with modern machine learning in predicting future exchange rates in comparison with the results of random walk. These results were examined using a root mean squared error (RMSE) and a Diebold–Mariano (DM) test. The main findings are as follows. First, when comparing the performance of fundamental models combined with machine learning with the performance of random walk, the RMSE results show that the fundamental models with machine learning outperform the random walk. In the DM test, the results are mixed as most of the results show significantly different predictive accuracies compared with the random walk. Second, when comparing the performance of fundamental models combined with machine learning, the models using the producer price index (PPI) consistently show good predictability. Meanwhile, the consumer price index (CPI) appears to be comparatively poor in predicting exchange rate, based on its poor results in the RMSE test and the DM test. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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15 pages, 3616 KiB

Open AccessArticle

Global Asset Allocation Strategy Using a Hidden Markov Model

by Eun-chong Kim, Han-wook Jeong and Nak-young Lee

J. Risk Financial Manag. 2019, 12(4), 168; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm12040168 - 06 Nov 2019

Cited by 8 | Viewed by 7630

Abstract

This study uses the hidden Markov model (HMM) to identify the phases of individual assets and proposes an investment strategy using price trends effectively. We conducted empirical analysis for 15 years from January 2004 to December 2018 on universes of global assets divided into 10 classes and the more detailed 22 classes. Both universes have been shown to have superior performance in strategy using HMM in common. By examining the change in the weight of the portfolio, the weight change between the asset classes occurs dynamically. This shows that HMM increases the weight of stocks when stock price rises and increases the weight of bonds when stock price falls. As a result of analyzing the performance, it was shown that the HMM effectively reflects the asset selection effect in Jensen’s alpha, Fama’s Net Selectivity and Treynor-Mazuy model. In addition, the strategy of the HMM has positive gamma value even in the Treynor-Mazuy model. Ultimately, HMM is expected to enable stable management compared to existing momentum strategies by having asset selection effect and market forecasting ability. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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15 pages, 704 KiB

Open AccessArticle

Social and Financial Inclusion through Nonbanking Institutions: A Model for Rural Romania

by Xiao-Guang Yue, Yong Cao, Nelson Duarte, Xue-Feng Shao and Otilia Manta

J. Risk Financial Manag. 2019, 12(4), 166; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm12040166 - 29 Oct 2019

Cited by 14 | Viewed by 4469

Abstract

The challenges of financial systems have immediate or medium-term social effects. The financial industry is constantly searching for measures to reduce these challenges, especially for those with little or no access to financial services. While current communication technologies make services more accessible through digital mobile platforms, there are still difficulties in establishing viable customer arrangements. In addition to the increased investment in financial technologies, nonbanking financial institutions have now expanded to offer more flexible services tailored to individual circumstances, especially those in isolated rural areas. This research outlines the network model of nonbanking financial institutions in Romania, as well as a microfinance model, based on the financial analysis of four national indicators of nonbanking financial institutions. Data used are presented in absolute values, from the annual numerical series for the reference period 2007–2017. The new initiatives and features incorporated in this Romanian model should be applicable elsewhere and will actively contribute to the expansion and sustainability of financial services, with a positive inclusive impact on society. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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52 pages, 29766 KiB

Open AccessArticle

AdTurtle: An Advanced Turtle Trading System

by Dimitrios Vezeris, Ioannis Karkanis and Themistoklis Kyrgos

J. Risk Financial Manag. 2019, 12(2), 96; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm12020096 - 08 Jun 2019

Cited by 9 | Viewed by 7301

Abstract

For this research, we implemented a trading system based on the Turtle rules and examined its efficiency when trading selected assets from the Forex, Metals, Commodities, Energy and Cryptocurrency Markets using historical data. Afterwards, we enhanced our Turtle-based trading system with additional conditions for opening a new position. Specifically, we added an exclusion zone based on the ATR indicator, in order to have controlled conditions for opening a new position after a stop loss signal was triggered. Thus, AdTurtle was developed, a Turtle trading system with advanced algorithms of opening and closing positions. To the best of our knowledge, for the first time this variation of the Turtle trading system has been developed and examined. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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27 pages, 1356 KiB

Open AccessConcept Paper

Blockchain Economical Models, Delegated Proof of Economic Value and Delegated Adaptive Byzantine Fault Tolerance and their implementation in Artificial Intelligence BlockCloud

by Qi Deng

J. Risk Financial Manag. 2019, 12(4), 177; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm12040177 - 25 Nov 2019

Cited by 8 | Viewed by 4723

Abstract

The Artificial Intelligence BlockCloud (AIBC) is an artificial intelligence and blockchain technology based large-scale decentralized ecosystem that allows system-wide low-cost sharing of computing and storage resources. The AIBC consists of four layers: a fundamental layer, a resource layer, an application layer, and an ecosystem layer (the latter three are the collective “upper-layers”). The AIBC layers have distinguished responsibilities and thus performance and robustness requirements. The upper layers need to follow a set of economic policies strictly and run on a deterministic and robust protocol. While the fundamental layer needs to follow a protocol with high throughput without sacrificing robustness. As such, the AIBC implements a two-consensus scheme to enforce economic policies and achieve performance and robustness: Delegated Proof of Economic Value (DPoEV) incentive consensus on the upper layers, and Delegated Adaptive Byzantine Fault Tolerance (DABFT) distributed consensus on the fundamental layer. The DPoEV uses the knowledge map algorithm to accurately assess the economic value of digital assets. The DABFT uses deep learning techniques to predict and select the most suitable BFT algorithm in order to enforce the DPoEV, as well as to achieve the best balance of performance, robustness, and security. The DPoEV-DABFT dual-consensus architecture, by design, makes the AIBC attack-proof against risks such as double-spending, short-range and 51% attacks; it has a built-in dynamic sharding feature that allows scalability and eliminates the single-shard takeover. Our contribution is four-fold: that we develop a set of innovative economic models governing the monetary, trading and supply-demand policies in the AIBC; that we establish an upper-layer DPoEV incentive consensus algorithm that implements the economic policies; that we provide a fundamental layer DABFT distributed consensus algorithm that executes the DPoEV with adaptability; and that we prove the economic models can be effectively enforced by AIBC’s DPoEV-DABFT dual-consensus architecture. Full article

(This article belongs to the Special Issue AI and Financial Markets)

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