Visual Explorations in Finance: with Self-Organizing Maps

297 Pages·1998·12.929 MB·English

by  Carlos Serrano-Cinca (auth.), Guido Deboeck PhD, Teuvo Kohonen PhD (eds.)

Springer Finance
Springer-Verlag Berlin Heidelberg GmbH
Springer Finance
Risk-Neutral Valuation: Pricing and Hedging of Financial Derivatives
N.H.Bingham and Rudiger Kiesel
ISBN i-85233-001-5 (1998)
Mathematics of Financial Markets
Robert J. Elliott and P. Ekkehard Kopp
ISBN 0-387-98553-0 (1998)
Mathematical Models of Financial Derivatives
Y.-K.Kwok
ISBN 981-3083-25-5 (1998)
Guido Deboeck and Teuvo Kohonen (Eds)
Visual Explorations
in Finance
with Self-Organizing Maps
With 129 Figures
including 12 Color Plates
, Springer
Guido Deboeck, PhD
38S0 North River Street, Arlington, VA 22207, USA
Teuvo Kohonen, PhD
Helsinki University of Technology, Neural Networks Research Centre,
P.O. Box 2200, FIN-020IS HUT, Finland
ISBN 978-1-84996-999-4
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Visual explorations in finance: with self-organizing maps.
- (Springer fmance; 3674)
1. Finance 2. Finance - Computer simulation
I. Deboeck, Guido J. II. Kohonen, Teuvo
332
ISBN 978-1-84996-999-4
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress
Deboeck, Guido.
Visual explorations in finance with self-organizing maps/Guido J. Deboeck and Teuvo
Kohonen (eds.).
p. cm. - (Springer finance)
Includes bibliographical references and index.
ISBN 978-1-84996-999-4 ISBN 978-1-4471-3913-3 (eBook)
DOI 10.1007/978-1-4471-3913-3
1. Finance - Decision making - Data processing. 2. Neural networks
(Computer science) 3. Self-organizing systems. I. Kohonen, Teuvo.
II. Title. III. Series. 98-11388
HG4012.5.D43 1998
332'.0285 - dc21 CIP
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Foreword
Often, when a technology becomes
commercially valuable it ceases to be an
academic subject. For such subjects, all
leading-edge knowledge and research
resides behind closed company doors.
Current examples of such technologies
include microprocessors, rocket engines,
and automobiles. State-of-the-art academic
research in such fields simply does not exist
(although advanced research on far future
concepts is alive and well).
Professor Robert Hecht-Nielsen
at WEBSOM'97, Espoo, Finland This book describes a rich selection of
Photo: 6JO, Helsinki, June 1997 financial, economic and marketing
applications of Teuvo Kohonen's Self
Organizing Map (SOM). In these application areas, SOMs have proven
to be of significant economic value. As a result, this area of work is
rapidly becoming a non-academic technology.
This book is perhaps the last look we will have at near-state-of-the
art SOM applications in these areas. It is thus apt that such a timely and
valuable collection of work be edited by Guido Deboeck, a leading
exponent of the use of computational intelligence methods in finance
and economics, and by the originator of SOM, Teuvo Kohonen. Their
efforts and that of their contributing authors will payoff handsomely for
us all.
San Diego, California Robert Hecht-Nielsen
September 1997
vii
Preface by Guido Deboeck
At the 1990 IJCNN (International Joint
Conference on Neural Networks) in Paris I
met Teuvo Kohonen for the first time. I
heard him speak very enthusiastically
about an algorithm that could organize
data based on a computer algorithm called
self-organizing maps (SOM). At the 1993
IJCNN in Seattle I suggested to Teuvo that
self-organizing maps might be useful to
apply to economic data, in particular the
World Development indicators, published
Dr. Guido Deboeck at ICONIP'97
annually by the World Bank. Following our
in Dunedin. New Zealand
Photo: Novernber 1997 conversation I sent the World Development
indicators to Helsinki. Two years later I
found a poverty map constructed on the basis of the World
Development indicators in the first edition of Teuvo's Self-Organizing
Maps. I was very pleased to see this first poverty map based on SOM.
In October 1996 Teuvo and I met in Arlington. On a nice fall
weekend in Virginia we discussed applications of self-organizing maps
to finance and economics. Over 3000 papers have been written about
SOM but most are in engineering; few focus on applications in finance
or economics.
In January 1997 I spent 48 hours in Helsinki: it was cold and dark,
the streets were covered with ice, getting around was dangerous, except
for the Finns who have gotten used to it. The meeting with Teuvo was
warm; we put together an initial outline and enjoyed a very nice dinner
in a Lapp restaurant. In February we invited several people to
contribute chapters. Most of the papers in this book were written in
April and June. In early June I was back in Helsinki and met the entire
Neural Network Research team at the WEBSOM'97 conference. This
was a very productive meeting, and this time I did get to see Helsinki!
The outline for this book changed several times: many chapters were
added including some on using SOM for real estate investments and
marketing. At the WEBSOM conference I also met Dr Gerhard Kranner
and Johannes Sixt of Eudaptics GmbH who provided me with access
ix
x Preface
to Viscovery SOMine. Thanks to it I was able to analyze the Chinese
consumer data that Bernd Schmitt provided in June 1997.
From the initial idea in October 1996 to a complete manuscript by
September 1997, this work involved collaboration between about 20
people from Spain to Finland with the editors in Helsinki and
Arlington. This book is the product of virtual teamwork, i.e. a team
with self-created objectives, motivation and discipline, without
structure or management. While this concept could be used in other
contexts the full meaning of "virtual teamwork" is yet to be understood
by many.
After my first book (Trading at the Edge) was published in April
1994, I was invited to make presentations in New York, London,
Frankfurt, Geneva, Singapore, Seoul, Nagoya and Beijing. On these
trips the most rewarding encounters were with people who wanted to
apply neural networks in their areas of interest, write a PhD, or a book
on the topics explored in Trading at the Edge. I hope the same will
happen with this one. May many take up the challenge of improving
on these novel ways of looking at financial, economic or marketing data
because knowledge is power, but to effectively acquire it, use it and
expand it, new modes of learning, synthesizing and collaboration will
need to be devised.
Arlington, Virginia Guido Deboeck
December 1997
Preface by Teuvo Kohonen
Prior to 1993 I had only heard of Guido
Deboeck and his application of neural
networks to financial problems. Therefore,
I was very much taken when he approached
me at the IJCNN'93 in Seattle and asked me
to do more work in financial applications.
Actually that was the right time for us, since
we were reorganizing our laboratory.
Besides the World Bank data, we were
starting bankruptcy analyses on small and
medium-sized enterprises with the Finnish
Professor Teuvo Kohonen at
Foundation, Kera Ltd.
WEBSOM'97, Espoo, Finland
Photo: GJD, June 1997 In 1996 Guido and I established close
cooperation that still continues. Actually I
engaged several bright and enthusiastic junior collaborators to this
project - Samuel Kaski, Antti Vainonen, Janne Nikkila, the SOM
Toolbox developers (Esa Alhoniemi, Johan Himberg, Kimmo Kiviluoto,
Jukka Parviainen and Juba Vesanto), and the WEBSOM group (Samuel
Kaski, Timo Honkela and Krista Lagus). Dr Samuel Kaski spent a lot
of time collaborating with Guido through e-mail and over the Internet.
This was quite a nice experience; we were working closely together
between Arlington (Virginia) and Espoo (Finland); transferring
outlines, data, ideas and revisions, while we did not see each other for
months. Isn't this an information age!
My personal share of the editing work has been much less than that
of Guido. I have been in the lucky situation that the people around me
have taken so many responsibilities, and I am very much obliged to all
of them.
Espoo, Finland Teuvo Kohonen
December 1997
xi
Acknowledgements
Teuvo Kohonen and Samuel Kaski contributed to my initial
understanding of self-organizing maps. Without their support and
efforts this book would never have been written. Carlos Serrano-Cinca's
work on financial and economic applications inspired me to undertake
this project.
Many people have contributed to this book. I wish to thank in
particular Eric de Bodt in Belgium; Marina Resta and Aristide Varfis
in Italy; Carlos Serrano-Cinca in Spain; Serge Shumsky in Russia,
Eero Carlson, Timo Honkela, Samuel Kaski, Kimmo Kiviluoto, and
Anna Tulkki in Finland; and Bernd Schmitt, who granted me access to
the Chinese consumer data in Shanghai. All of them have made
pioneering contributions. Their work has encouraged me to put these
applications in one volume. Several others have contributed to chapters
in this book (Marie Cottrell, Philippe Gregoire, Jari Kangas, Jorma
Laaksonen, Krista Lagus, Kari Sipila, Cristina Versino,A.V. Yarovoy) or
have reviewed earlier drafts of the manuscript (Masud Cader, Luc De
Wulf, Mark Embrechts, Rik Ghesquiere, Gerhard Kranner, Jack L.
Upper, J.D. Von Pischke). All deserve credit for contributing to this
book.
Many thanks are also due to the publisher, editor and production
coordinator. Dr Susan Hezlet of Springer-Verlag made the publishing
process really easy; Lyn Imeson performed a superb job in editing the
manuscript; Nick Wilson managed the print process and was very
helpful in improving the quality of all the figures; and Vicki Swallow
coordinated all communications between the editors, the publisher, and
everyone else involved in this process. Needless to say that all
remaining errors or misrepresentations are mine.
A word of thanks also to my former colleagues at the World Bank:
Sven Sandstrom, Ian Scott and Hywel Davies have each in their own
way contributed to making this project feasible. Luc De Wulf, Adrien
Goorman, Rik Ghesquiere, Paul Staes and many others have through
their friendship and moral support continued to provide invaluable
help over many years.
This project could not have come to fruition without the support
from my family. Toni, my oldest son, read and edited all the original
xiii