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A Correlation-Embedded Attention Module to Mitigate Multicollinearity: An Algorithmic Trading Application

Author

Listed:
  • Jireh Yi-Le Chan

    (Faculty of Business and Finance, University Tunku Abdul Rahman, Perak 31900, Malaysia
    These authors contributed equally to this work.)

  • Steven Mun Hong Leow

    (Faculty of Business and Finance, University Tunku Abdul Rahman, Perak 31900, Malaysia
    These authors contributed equally to this work.)

  • Khean Thye Bea

    (Faculty of Business and Finance, University Tunku Abdul Rahman, Perak 31900, Malaysia)

  • Wai Khuen Cheng

    (Faculty of Information and Communication Technology, University Tunku Abdul Rahman, Perak 31900, Malaysia)

  • Seuk Wai Phoong

    (Department of Operation and Management Information System, Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur 50603, Malaysia)

  • Zeng-Wei Hong

    (Department of Information Engineering and Computer Science, Feng Chia University, Taichung 40724, Taiwan)

  • Jim-Min Lin

    (Department of Information Engineering and Computer Science, Feng Chia University, Taichung 40724, Taiwan)

  • Yen-Lin Chen

    (Department of Computer Science and Information Engineering, National Taipei University of Technology, Taipei 106344, Taiwan)

Abstract

Algorithmic trading is a common topic researched in the neural network due to the abundance of data available. It is a phenomenon where an approximately linear relationship exists between two or more independent variables. It is especially prevalent in financial data due to the interrelated nature of the data. The existing feature selection methods are not efficient enough in solving such a problem due to the potential loss of essential and relevant information. These methods are also not able to consider the interaction between features. Therefore, we proposed two improvements to apply to the Long Short-Term Memory neural network (LSTM) in this study. It is the Multicollinearity Reduction Module (MRM) based on correlation-embedded attention to mitigate multicollinearity without removing features. The motivation of the improvements is to allow the model to predict using the relevance and redundancy within the data. The first contribution of the paper is allowing a neural network to mitigate the effects of multicollinearity without removing any variables. The second contribution is improving trading returns when our proposed mechanisms are applied to an LSTM. This study compared the classification performance between LSTM models with and without the correlation-embedded attention module. The experimental result reveals that a neural network that can learn the relevance and redundancy of the financial data to improve the desired classification performance. Furthermore, the trading returns of our proposed module are 46.82% higher without sacrificing training time. Moreover, the MRM is designed to be a standalone module and is interoperable with existing models.

Suggested Citation

  • Jireh Yi-Le Chan & Steven Mun Hong Leow & Khean Thye Bea & Wai Khuen Cheng & Seuk Wai Phoong & Zeng-Wei Hong & Jim-Min Lin & Yen-Lin Chen, 2022. "A Correlation-Embedded Attention Module to Mitigate Multicollinearity: An Algorithmic Trading Application," Mathematics, MDPI, vol. 10(8), pages 1-13, April.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:8:p:1231-:d:789775
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    References listed on IDEAS

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    1. Lucey, Brian M. & Muckley, Cal, 2011. "Robust global stock market interdependencies," International Review of Financial Analysis, Elsevier, vol. 20(4), pages 215-224, August.
    2. Sima Siami-Namini & Akbar Siami Namin, 2018. "Forecasting Economics and Financial Time Series: ARIMA vs. LSTM," Papers 1803.06386, arXiv.org.
    3. O. B. Sezer & M. Ozbayoglu & E. Dogdu, 2017. "An Artificial Neural Network-based Stock Trading System Using Technical Analysis and Big Data Framework," Papers 1712.09592, arXiv.org.
    4. Jacinta Chan Phooi M'ng & Azmin Azliza Aziz, 2016. "Using Neural Networks to Enhance Technical Trading Rule Returns: A Case with KLCI," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 2(1), pages 63-70, January.
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    Cited by:

    1. Jireh Yi-Le Chan & Seuk Wai Phoong & Wai Khuen Cheng & Yen-Lin Chen, 2022. "Support Resistance Levels towards Profitability in Intelligent Algorithmic Trading Models," Mathematics, MDPI, vol. 10(20), pages 1-17, October.
    2. Wai Khuen Cheng & Khean Thye Bea & Steven Mun Hong Leow & Jireh Yi-Le Chan & Zeng-Wei Hong & Yen-Lin Chen, 2022. "A Review of Sentiment, Semantic and Event-Extraction-Based Approaches in Stock Forecasting," Mathematics, MDPI, vol. 10(14), pages 1-20, July.
    3. Messner, Wolfgang, 2024. "Exploring multilevel data with deep learning and XAI: The effect of personal-care advertising spending on subjective happiness," International Business Review, Elsevier, vol. 33(1).

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