Machine learning methods for financial forecasting and trading profitability: Evidence during the Russia–Ukraine war

Abstract

PurposeThis study aims to evaluate the effectiveness of machine learning models to yield profitability over the market benchmark, notably in periods of systemic instability, such as the ongoing war between Russia and Ukraine.Design/methodology/approachThis study made computational experiments using support vector machine (SVM) classifiers to predict stock price movements for three financial markets and construct profitable trading strategies to subsidize investors’ decision-making.FindingsOn average, machine learning models outperformed the market benchmarks during the more volatile period of the Russia–Ukraine war, but not during the period before the conflict. Moreover, the hyperparameter combinations for which the profitability is superior were found to be highly sensitive to small variations during the model training process.Practical implicationsInvestors should proceed with caution when applying machine learning models for stock price forecasting and trading recommendations, as their superior performance for volatile periods – in terms of generating abnormal gains over the market – was not observed for a period of relative stability in the economy.Originality/valueThis paper’s approach to search for financial strategies that succeed in outperforming the market provides empirical evidence about the effectiveness of state-of-the-art machine learning techniques before and after the conflict deflagration, which is of potential value for researchers in quantitative finance and market professionals who operate in the financial segment.

Guest editorial: Special issue: Applications of artificial intelligence and machine learning in business, finance and economics

“…Peng and Souza (2024) have contributed to the paper entitled “Machine learning methods for financial forecasting and trading profitability: Evidence during the Russia–Ukraine war.” The work evaluated the potential of support vector machines for stock price movement direction forecasting. Computational experiments used data before and after the deflagration of the Russia–Ukraine war.…”