Selection of the optimal trading model for stock investment in different industries.

Abstract

In general, the stock prices of the same industry have a similar trend, but those of different industries do not. When investing in stocks of different industries, one should select the optimal model from lots of trading models for each industry because any model may not be suitable for capturing the stock trends of all industries. However, the study has not been carried out at present. In this paper, firstly we select 424 S&P 500 index component stocks (SPICS) and 185 CSI 300 index component stocks (CSICS) as the research objects from 2010 to 2017, divide them into 9 industries such as finance and energy respectively. Secondly, we apply 12 widely used machine learning algorithms to generate stock trading signals in different industries and execute the back-testing based on the trading signals. Thirdly, we use a non-parametric statistical test to evaluate whether there are significant differences among the trading performance evaluation indicators (PEI) of different models in the same industry. Finally, we propose a series of rules to select the optimal models for stock investment of every industry. The analytical results on SPICS and CSICS show that we can find the optimal trading models for each industry based on the statistical tests and the rules. Most importantly, the PEI of the best algorithms can be significantly better than that of the benchmark index and "Buy and Hold" strategy. Therefore, the algorithms can be used for making profits from industry stock trading.