Advanced financial market forecasting: integrating Monte Carlo simulations with ensemble Machine Learning models

Akash Deep; Akash Deep

doi:10.3934/QFE.2024011

Quantitative Finance and Economics

2024, Volume 8, Issue 2: 286-314. doi: 10.3934/QFE.2024011

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Research article

Advanced financial market forecasting: integrating Monte Carlo simulations with ensemble Machine Learning models

Akash Deep ^,

Department of Interdisciplinary Studies, Graduate School, Texas Tech University, 2500 Broadway W, Lubbock, TX 79409, USA

Received: 07 December 2023 Revised: 11 April 2024 Accepted: 26 April 2024 Published: 06 May 2024
JEL Codes: C45, C53, G11, G17

This paper presents a novel integration of Machine Learning (ML) models with Monte Carlo simulations to enhance financial forecasting and risk assessments in dynamic market environments. Traditional financial forecasting methods, which primarily rely on linear statistical and econometric models, face limitations in addressing the complexities of modern financial datasets. To overcome these challenges, we explore the evolution of financial forecasting, transitioning from time-series analyses to sophisticated ML techniques such as Random Forest, Support Vector Machines, and Long Short-Term Memory (LSTM) networks. Our methodology combines an ensemble of these ML models, each providing unique insights into market dynamics, with the probabilistic scenario analysis of Monte Carlo simulations. This integration aims to improve the predictive accuracy and risk evaluation in financial markets. We apply this integrated approach to a quantitative analysis of the SPY Exchange-Traded Fund (ETF) and selected major stocks, focusing on various risk-reward ratios including Sharpe, Sortino, and Treynor. The results demonstrate the potential of our approach in providing a comprehensive view of risks and rewards, highlighting the advantages of combining traditional risk assessment methods with advanced predictive models. This research contributes to the field of applied mathematical finance by offering a more nuanced, adaptive tool for financial market analyses and decision-making.
- financial forecasting,
- Monte Carlo simulations,
- Machine Learning in finance,
- ensemble learning models,
- risk assessment in financial markets,
- risk reward ratios
Citation: Akash Deep. Advanced financial market forecasting: integrating Monte Carlo simulations with ensemble Machine Learning models[J]. Quantitative Finance and Economics, 2024, 8(2): 286-314. doi: 10.3934/QFE.2024011

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Abstract

This paper presents a novel integration of Machine Learning (ML) models with Monte Carlo simulations to enhance financial forecasting and risk assessments in dynamic market environments. Traditional financial forecasting methods, which primarily rely on linear statistical and econometric models, face limitations in addressing the complexities of modern financial datasets. To overcome these challenges, we explore the evolution of financial forecasting, transitioning from time-series analyses to sophisticated ML techniques such as Random Forest, Support Vector Machines, and Long Short-Term Memory (LSTM) networks. Our methodology combines an ensemble of these ML models, each providing unique insights into market dynamics, with the probabilistic scenario analysis of Monte Carlo simulations. This integration aims to improve the predictive accuracy and risk evaluation in financial markets. We apply this integrated approach to a quantitative analysis of the SPY Exchange-Traded Fund (ETF) and selected major stocks, focusing on various risk-reward ratios including Sharpe, Sortino, and Treynor. The results demonstrate the potential of our approach in providing a comprehensive view of risks and rewards, highlighting the advantages of combining traditional risk assessment methods with advanced predictive models. This research contributes to the field of applied mathematical finance by offering a more nuanced, adaptive tool for financial market analyses and decision-making.

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