Article DOI: 10.1111/exsy.

12164

Forecasting financial time series using a methodology based

on autoregressive integrated moving average and Taylor
expansion
Guisheng Zhang,1,2 Xindong Zhang1,2* and Hongyinping Feng3
(1) Institute of Management and Decision, Shanxi University, Taiyuan, Shanxi 030006, China
E-mail: xindongzhang@sxu.edu.cn
(2) School of Economics and Management, Shanxi University, Taiyuan, Shanxi 030006, China
(3) School of Mathematical Sciences, Shanxi University, Taiyuan, Shanxi 030006, China

Abstract: Financial time series prediction is regarded as one of the most challenging job because of its inherent complexity, and the
hybrid forecasting model incorporating autoregressive integrated moving average and support vector machine (SVM) has been
implemented widely to deal with the both linear and nonlinear patterns in time series data. However, the SVM model does not take into
consideration the time correlation knowledge between different data points in time series, which impacts the learning efciency of the
SVM in real application. To overcome this restriction, this paper proposes the Taylor Expansion Forecasting model as an alternative to
the SVM and develops a novel hybrid methodology via combining autoregressive integrated moving average and Taylor Expansion
Forecasting to exploit the comprehensive forecasting capacity to the nancial time series data with noise. Both theoretical proof and
empirical results obtained on several commodity future prices demonstrate that the proposed hybrid model improves greatly the forecasting
accuracy.
Keywords: nancial time series forecasting, ARIMA, SVM, Taylor expansion, tracking differentiator

1. Introduction Zhang (2003) proposes a combining approach to time

In recent years, nancial time series forecasting based on
previously observed values has become an important issue
in investment and nancial decision-making and has drawn
considerable attention as an active research area (Shi et al.,
1999; Zhu et al., 2008). As a special kind of time series, the
nancial time series usually spaced at uniform time intervals
(Brillinger, 1974) is inuenced by a great number of factors,
most of which interact in very complex ways. For this
reason, forecasting nancial time series through
fundamentalist approaches using well-dened trading
strategies has been regarded as one of the most difcult task
of modern time series forecasting (Abu-Mostafa & Atiya,
1996; Atsalakis & Valavanis, 2009; Polimenis &
Neokosmidis, 2014; Wei et al., 2014; Kauffman et al.,
2015). Because a single linear or nonlinear model may not
be totally sufcient to identify all the characteristics of the
time series datasets, many hybrid models have been
proposed to complement each other and make use of each
models unique feature (Shi et al., 1988; Tay & Cao, 2001;
Tay & Cao, 2002; Kim, 2003; Zhang, 2003; Huang et al.,
2005; Pai & Lin, 2005; Hansen et al., 2006; Lu et al., 2009;
Hadavandi et al., 2010; Lee & Tong, 2011; Nie et al., 2012;
Wang et al., 2012; Kao et al., 2013; Zhu & Wei, 2013; Guo
et al., 2014; Cheng & Yang, 2015; Xiong et al., 2015).
series forecasting. Firstly, the autoregressive integrated
moving average (ARIMA) model is applied to estimate the
linear component, and the residuals from the ARIMA
model are estimated by the Articial Neural Network
(ANN) model in the second step. Finally, the linear and
nonlinear forecasting values obtained from the different
models are combined together as the nal forecasting values
of the time series data. The empirical results with three real-
data sets clearly demonstrate that the hybrid model is
superior to each component model used in isolation.
However, the ANN also suffers from a number of
shortcomings such as local minimum traps, difculty in
determining the hidden layer size and risk of model over-
tting (Tay & Cao, 2001; Cao, 2003). On the contrary,
support vector machine (SVM) proposed by Vapnik enjoys
a global optimum and exhibits better prediction accuracy.
Based on the structured risk minimization principle, SVM
seeks to minimize an upper bound of the generalization
error instead of the empirical error asin other neural
networks (Vapnik, 1995). Therefore, the linear ARIMA
model and the nonlinear SVM model are applied jointly in
many hybrid methodologies, aiming to improve the
forecasting performance to the time series data. Pai and
Lin (2005) demonstrate that a hybrid methodology of

2016 Wiley Publishing Ltd Expert Systems, October 2016, Vol. 33, No. 5 501
ARIMA and SVM takes advantage of the unique strength of
ARIMA and ANN in linear and nonlinear modelling and
obtain promising computational tests on 10 different stocks.
Nie et al. (2012) presents the hybrid of ARIMA and SVM to
forecast the short-term load series and demonstrates that the
SVM extracts the sensitive component to correct the
deviation of the former forecasting by the ARIMA greatly.
Wang et al. (2012) propose a novel approach via combining
ARIMA and SVM to forecast the different return of
equities, and experiments show that the SVM can deal with
the textual information to improve the nancial time series
forecasting accuracy greatly. Zhu and Wei (2013) develop a
methodology combining ARIMA and least square SVM to
predict the carbon prices. Experimental results reveal that
the proposed hybrid methodology is suitable fore carbon
price forecasting problem.
Although the hybrid models exhibit favourable overall
forecasting performance, there are still some limitations
affecting the forecasting accuracy of these models. As a kind
of special data, the relations of different data points in time
series will be increasingly strong with the time interval
decreasing, that is, to say, one data point in time series can
be inuenced by its previous or next neighbouring points
more easily than other. However, the SVM model does
not take into account this kind of autocorrelations between
different points in real-time series. Theoretically, SVM
employs a kernel function K(xi, xj) = (xi)
(xj) to
determine how close an input vector is to each stored data
on dot products between patterns, and the relationship of
the training instances expressed by Euclidean distance in
the SVM cannot reect the real correlations for the series
data depending on time sequence. This limitation inuences
the learning efciency of the machine and could result in a
dramatic decrease in generalization performance of the
SVM when dealing with the time series data in real
situations. Furthermore, as a supervised learning machine
with multiple inputs Xi = {xi1,


, xit,


, xiN} and one output
yi R, the dimensions of the input vector N affect the
generalization performance of the SVM greatly. However,
the determination of the input variables dimension N is a
hard job when modelling the nonlinear part by the SVM
model, which is usually determined by the experiences in real
situations or determined by the backtracking steps value p in
the ARIMA(p, d, q) model (Zhu & Wei, 2013). And once the
number of the input variables is determined, the backtracking
steps to the previous data points in the time series are xed,
and the information before the feedback steps will be omitted.
Therefore, the SVM method cannot realize the dynamic
backward search for the historical correlation knowledge
and will inuence the information absorption hidden in the
series data, which further undermines the generalization
performance of the SVM in real applications.
In order to overcome the limitations discussed earlier, a
new Taylor Expansion Forecasting (TEF) model based on
the tracking differentiator is proposed as an alternative to
SVM to forecast the nonlinear components in time series
forecasting problem. In the TEF model, the time series data
502 Expert Systems, October 2016, Vol. 33, No. 5
are supposed to be generated from a function f, and then the
time series data can be forecasted using the previous historical
data by Taylor expansion, in which the tracking differentiator
is used to compute the specied order derivatives of the time
series function. The highlight is that the TEF model can be
converted into integration form of the historical data and
express the different relationship between different data points
in the time series through the weighted function instead of the
Euclidean distance in the SVM. Therefore, compared with the
SVM, the TEF model not only incorporates the real
correlations among the data points of the time series but also
realizes dynamic backtracking to the historical information
hidden in time series data points. So a novel hybrid
methodology combining ARIMA and TEF model is
developed to forecast the nancial time series. In this
proposed methodology, the ARIMA and the TEF model
are employed to capture the linear and nonlinear components
of nancial time series, respectively, and their forecasting
values are integrated into the nal forecasting results. Finally,
the authors evaluate the forecasting performance of the
hybrid ARIMA and SVM model and the hybrid ARIMA
and TEF model by forecasting several main future prices.
The results of computational tests are found to be promising.
The rest of this paper is organized as follows: in the next
section, the individual ARIMA, SVM and TEF models to
time series forecasting are described. Section 3 introduces
the development of the novel hybrid methodology. Section 4
reports the experimental results, and Section 5 provides
conclusions and predicts some future research directions.
2. Individual forecasting model employed in the hybrid
model
2.1. Autoregressive integrated moving average model
The ARIMA method introduced by (Box & Tiao, 1975) has
had an enormous impact on the theory and practice of
modern time series analysis and forecasting (Gooijer &
Hyndman, 2006; Pan et al., 2014). In the ARIMA model, if
the transferred time series is stationary, the future value of a
variable can be forecasted by the linear combination of past
values and past errors. Suppose X fxi gNi1 is a time series,
an ARIMA(p, d, q) model can be formulated as follows:
^lt 0 xt1 xt2


xtp  t  1 t1 (2:1)
1 2 p
2 t2 


 q tq
where parameters p, d and q are non-negative integers
that refer to the order of the autoregressive, integrated
and moving average parts of the model, respectively, xt
is the actual value of the time series obtained by differencing
d times, l t is the forecast value of xt, t is the residual
term between the actual data and the forecasting value and
t  i(i = 1, 2,


, p) and t  j ( j = 1, 2,


, q) are the coefcients
to be estimated. Having completed the order determination
(determining the value of p and q) and parameter estimation
2016 Wiley Publishing Ltd
(determining the value of and ), the ARIMA model can be be solved more easily. The optimization problem can be
applied to forecast the value of the time series. The major described as the following form by a standard dualization
advantage of the ARIMA model is that it is basically a method utilizing Lagrange multipliers.
data-oriented approach that models the linear patterns of the
time series well and is relatively easy to use. However, being a
1X N X N     
class of linear model, the ARIMA model can only capture min i  i j  j K xi ; yj
linear patterns in a time series (Zhang, 2003; Wang et al.,
2 i1 j1
2012; Zhu & Wei, 2013). Therefore, the nonlinear components X
N   X N  
i i  yi i  i r (2:4)
in the time series necessitate a proper nonlinear model.
i1 i1

8
2.2. Support vector machine model > X
N  
>
< i  i 0
Support vector machine is a novel neural network s:t: i1 (2:5)
>
> C
classication technique, which enjoys good generalization : 0 i ; i ; i 1; 2; ; N :
performance and implement global optimization solution N
simultaneously (Vapnik, 1995). Based on statistical learning 
Here, i ; i are Lagrange multipliers, and the data points
theory, SVM overcomes the curse of dimensionality and 
with non-zero i ; i pairs are called support vectors.
over-tting problem. K(xi, xj) is called kernel function and obtained by K(xi, xj)
In a regression problem, -insensitive loss function was = hi(xi)
(xj) in the feature space. Some common kernels
introduced in regression model to obtain SVR, which has include radial basis function (Gaussian), polynomial, spline
been applied to nancial time series problems and shown a or even sigmoidal functions (Vapnik, 1998).
quite good performance (Tay & Cao, 2002; Kim, 2003; Yuan
et al., 2010; Rubio et al., 2011; Duan & Xu, 2012; Wang,
2015). If we use a set of training patterns fxi ; yi gNi1 , where 2.3. Taylor Expansion Forecasting model based on the
xi Rn and yi R, the target of  SV regression is to nd a tracking differentiator
regression hyperplane with an -insensitive band from the In fact, at least from the mathematical point of view, there are
actually obtained targets yi for all the training data. a large number of nancial time series, which can be
Therefore, the objective function and constraints for SVR forecasted just by themselves. For example, suppose that
can be formulated as a convex optimization problem: fX i gNi1 is a nancial time series, which is generated from a
1 smooth function f(t) with sampling interval h. It follows from
min
2
w2 the Taylor expansion that, for any ti  1 0, ti > ti  1, i [1, N].


y  < w; xi > b
s:t: i (2:2) f t i f t i1 h
< w; xi > b  yi
1
f t i1 f_ t i1 h fti1 h2
2
The minimization of norm 12 w in the previous case is 2
1
used to ensure the function atness, and is a free parameter f t i1 hh3 ; 0; 1 (2:6)
6
that serves as a threshold: all predictions have to be within
an range of the true predictions. The smaller its value, where h is the turning parameter that represents the time
the higher accuracy of learning is required, and more interval between ti  1 and ti of time series. Provided the h
support vectors need to be found by the algorithm. is small enough, the previous formula implies that
Sometimes, some errors are wanted to be allowed.
Therefore, two relaxation factors, 0 and * 0, are 1
f t i1 hf ti1 f_ ti1 h ft i1 h2 (2:7)
introduced into the constraints of the optimization problem, 2
and the optimization problem referred previously becomes

XN  If we have known some values of f at time ti  1, for

1 
min
2
w 2
C i i example, f ti1 ; f_ ti1 and ft i1 , then we are able to
i1 obtain the value of f at time (ti  1 + h) by (2.7). This means
8 that we nish a forecasting at time ti  1 to the future time
< yi  < w; xi > b i
(ti  1 + h), with the error
s:t: < w; xi > b  yi i (2:3)
:
i ; i 0;
1
f ti1 ti1 hh3 (2:8)
where C > 0, as penalty degree of the sample with error 6
exceeding , is a regularized constant determining the Remark 1. Although the nancial prices series is neither
trade-off between the training error and the model atness. smooth nor differentiable, it still can be forecasted by the model.
Using the dual formulation, the optimization problem can The reason can be explained by the following arguments.

2016 Wiley Publishing Ltd Expert Systems, October 2016, Vol. 33, No. 5 503
 For any function f L2(0, T) with T > 0 ( f can be neither f : sup j f tj: (2:12)
t0;
smooth nor differentiable) where L2 0; T

T 

f 0 f 2 t dt < , it follows from the well-known Obviously, all the function in F2 can be forecasted
mathematically in the sense (2.7) with error (2.8). So we
real-analysis theory that there exists a sequence
will call F2 the second-order mathematical-forecasting set.
ff n gn1 C 0; T such that
For any given time series fX i gNi1 , we assume that fX i gNi1
are sampling points of a function F2 with step h. That is,
f n f as n in L2 0; T (2:9)
0 x1 ; h x2 ; ; N  1h xN (2:13)
T
That is to say 0 f n  f 2 dt0; n , and this In order to make a one-step forecast for fX i gNi1 (forecast xN
convergence implies that fn can be considered as an estimation + 1 = (Nh)), according to (2.7), we have to estimate _ N  1h
of f, provided n is large enough. We divide f into two parts: and N  1h (the value of the ((N  1)h) is known in one-
step forecasting model). However, because of the sensitiveness
f t f n t f t  f n t  : f 1 t f 2 t; t 0 (2:10) to the noise, the derivative of the usually rapidly varying noise
will drown out the derivative of the signals. Therefore, it is
not feasible to use nite difference to approximate the
where f1 C (0, T) is differentiable and f2 L2(0, T) is very derivatives of . Fortunately, the derivatives of can be
small in norm
L2 0;T for large n. We regard the second approximated by applying the tracking differentiator, which is
term f2 as the high-frequency disturbance or noise that is used to extract derivatives from the corrupted signals (Dabroom
useless to the forecasting. & Khalil, 1999; Guo et al., 2002; Ahrens & Khalil, 2009; Feng &
Remark 2. Obviously, the forecasting method (2.6) or (2.7) Li, 2013). For details, see the appendix. A simulation of tracking
can be extended to the nth order theoretically. However, differentiator is plotted in Figure 1.
owing to the properties of tracking differentiator Feng and By using the tracking differentiator, a one-step forecast
Li (2013), the recommended order is n = 2, 3, 4. In this work, can be made for fxi gNi1 in the sense of (2.7). More specially,
without loss of generality, we only consider the second-order
forecasting formula (2.7).
For this purpose, we dene 1
xN 1 N hxN z1 h z2 h2 ; (2:14)
2


F 2 : f H 3 0;  f_ f f < (2:11) where z1 and z2, obtaining from the tracking differentiator,
are used to approximate _ N  1h and N  1h ,
respectively. Although this idea is simple, a large number
where H3(0, ) is a Hilbert space and
is dened by of numerical experiments show that it is quite effective.
15 1.5

10 1

5 0.5

0 0

5 0.5

10 1

15 1.5
0 2 4 6 8 10 12 0 2 4 6 8 10 12

Figure 1: = 0.05, = 0.01.

504 Expert Systems, October 2016, Vol. 33, No. 5 2016 Wiley Publishing Ltd
We call this method TEF model. Finally, the previous d
V s AV s Ds; (2:21)
discussion illustrates that in order to make a forecasting ds
for the time series fxi gNi1 by (2.14), what we have to do is
where
to obtain z1 and z2. Consequently, the key issue is how to
obtain z1 and z2 by tracking differentiator. 0 1
0 1 v s 0 1
Next, we introduce some notation. Let X = (x1, x2, 0 1 0 Bd C 0
B C
x3) 3. Dene B C B vsC B C
A@0 0 1 A; V s B ds C; Ds @ 0 A:
q B 2 C
6 6 3 @ d A
 s 3
X 2 x21 x22 x23 (2:15) v s
ds2
(2:22)
We denote by A F the Frobenius norm of the matrix A.
The authors apply the following third-order high-gain tracking The solution of system (2.21) is found to be
differentiator (Dabroom & Khalil, 1999; Feng & Li, 2013):
8 s
>
>
3
z_ t z2 t  z1 t  t  ; V s eAs V 0 0 e As D d (2:23)
>
> 1
>
>
>
< 6
z_ 2 t z3 t  2 z1 t  t ; Because A is Hurwitz, there exist constants , L > 0 such
(2:16)
>
>  s
>
> 6 F Le
that eAs . It follows from (2.22) and (2.23) that
> z_ 3 t
>  3 z1 t  t ;
>
:
e
s
z1 0 z10 ; z2 0 z20 ; z3 0 z30 ; V s2 eAs V 02 0
As
D d 2
s
V 02 Les 0 D 2 Les d (2:24)
where (z10, z20, z30) 3 is the initial value and is the
turning parameter. In (2.16), (t) is the input, and z1(t), z2 L
V 02 Les 3
(t), z3(t) the output, which are used to approximate w
t; _ t; t , respectively. That is,
More specially, we have the following lemma. 
Lemma 1. Suppose that F2. Then, for any initial data
(z10, z20, z30) , there exist two positive constants ,
3
_ 1 1
1 t ; 1 t ; 1 t 2

V 0 Le
2 2
2 t=

L
independent of t such that system (2.16) satisfy (2:25)

jz1 t  t j jz2 t  _ t j On the other hand, it follows from (2.18) that

jz3 t  t j 2 et= ; t 0: (2:17) 8
3
> _ 1 t 1 t ;
< 2 t
(2:26)
_ 3 z3  , the
Proof If we let 1 z1  ; 2 z2  ; : t t t 3_ t
> 6
3 1
error system is governed by the following: 2 1 1
8
>
> 3 Combining (2.15), (2.25) and (2.26), we are able to
>
> _ 1 t 2 t  1 t;
>
> conclude (2.17) easily with
>
>
<_ 6

2 t 3 t  2 1 t ;
(2:18) max LV 02 ;
L
>
>
>
> 6
>
> _ t  3 1 t  t;
> 3
>
: So the proof is complete.
1 0 10 ; 2 0 20 ; 3 0 30 :
In order to use the forecasting algorithm (2.14), we discretize
the system (2.16) by backward Euler method as the following:
where 10 z10  0; 20 z20  _ 0; 30 z30  0 ,
(2.18) can be rewritten as follows: 8 3
>
> Z 1 i 1 Z 1 i Z 2 ih i  Z 1 ih;
>
>
>
>
1 t 3 31 t 2 6_ 1 t 6 1 t  t3 (2:19) >
< 6
Z 2 i 1 Z 2 i Z 3 ih 2 i  Z 1 ih;
(2:27)
>
> 6
Let t = s and v(s) = 1(s). Then it follows that >
>
>
> Z 3 i 1 Z 3 i 3 i  Z 1 i h;
>
:
Z 1 1 z10 ; Z 2 1 z20 ; Z 3 1 z30 ;
d3 d2 d
v s 3 vs 6 vs 6vs  s3 (2:20)
ds3 ds2 ds
which, together with (2.13) and (2.14), lead easily to our
which can be rewritten as an evolution equation: forecasting formula

2016 Wiley Publishing Ltd Expert Systems, October 2016, Vol. 33, No. 5 505
 1 forecasting. That is its insensitivity to small high-frequency
xN 1 xN Z 2 N h Z 3 N h2 (2:28)
2 noise (Guo et al., 2002; Ahrens & Khalil, 2009).
Consequently, the forecasting model (2.7) is still feasible to
Theorem 1. Suppose that fxi gNi1 is a nancial time series the following set
sampled from a function F2 with sampling interval h.
That is, (0) = x1, (h) = x2, , ((N  1)h) = xN. Then, for
any initial data (x10, x20, x30) 3, there exists a positive F2 : f f j f H 3 0; ; _f f f
constant C* independent of h such that (2.27) and (2.28) < : ; is some high frequency noiseg
satisfy (2:34)
1
lim jxN 1  N hj C  h2 h3 (2:29)
0 6 provided is sufcient small.
Therefore, our forecasting strategy (2.14) seems still valid
Proof The Taylor expansion of at t = (N  1)h is as for the most the nancial time series. The numerical
follows: experiments can support our statements.
In fact, system (2.16) can be written as the following
N h N  1h _ N  1hh (2:30) abstract form:
1 1

N  1hh2 h3 d
2! 3! Z t A h Z t V h f t
dt
where (N  1)h < < Nh. Combining (2.16), (2.28) and
(2.30), we have Z(0) = 0, (2.35) where Z(t) = (z1(t), z2(t), z3(t)) and
jxN 1  Nhj 0 1 2 3
3=h 1 0 3=h
1 B C 6 7
jZ 2 N  _ N  1hjh jZ 3 N  N  1hjh2 Ah @ 6=h2 0 1 A; V h 4 6=h2 5 (2:35)
1  2!
3 3
 h3 jZ 2 N  z2 N  1hj jz2 6=h 0 0 6=h
3!
1 (2:31)
N  1h  _ N  1hjh jZ 3 N  z3 We solve equation (2.35) to obtain
2!
N  1hj jz3 N  1h  N  1hjh2 t t
1  Z t 0 eAh t V h f d 0 e Ah t V h f t  d (2:36)
 h3
3!
Because (2.27) is the discretization of (2.16) by backward Because the matrix Ah is Hurwitz for any h > 0, there exist
Euler method (the convergence of backward Euler method two positive constants L and independent of time t such
can be found in (Butcher, 2003), there exists a positive that
constant C* independent of h such that
e Ah t 3 Let 0 as t (2:37)
jZ 2 N  z2 N  1hj (2:32)
jZ 3 N  z3 N  1hj C  h:
It follows from (2.36) that Z(t) is actually a weighted
average of f over the interval (0, t) by regarding eAh t as
Applying Lemma 2.1, there exist two positive constants
the weighted function. If we let 0 < t1 < t2 < t, then f(t2) is
and such that
more closer related to f(t) than f(t1) because of (2.37),
jz2 N  1h  _ N  1hj (2:33) which expresses increasing tight relationship with the

jz3 N  1h  N  1hj 2 ehN 1= decreasing time intervals between the neighbouring points

: in the time series data, and this instinctive ability of
incorporating the time correlations would help to improve
the forecasting performance of the TEF model in real
Combining (2.31), (2.32) and (2.33), we get (2.29). The proof applications.
is complete. In essence, the solving process of the f_ ti1 and ft i1 by
Remark 3. Equation (2.29) means that xN + 1 can be (2.36) is the integration of the function eAh t V h f before
regarded as a one-step forecasting for the time series time t. This integration expression shows that the TEF
fxi gNi1 , provided h, is small enough. Consequently, our model can realize the dynamic backward search to make full
forecasting strategy (2.14) is valid for nancial time series use of the historical knowledge in the time series and avoid
if we choose sufciently small. the selection problem of optimal backtracking steps that
served as the input variables in the SVM model.
Remark 4. Here, we note that the high-gain tracking Furthermore, the one-parameter setting mechanism of the
differentiator (2.16) enjoys a very good property for our TEF model simplies the application.

506 Expert Systems, October 2016, Vol. 33, No. 5 2016 Wiley Publishing Ltd
3. The hybrid methodology autoregressive integrated
moving average and Taylor Expansion Forecasting
development
Because a real-world time series is complex in nature, there
is a universal agreement that a hybrid strategy incorporating
both linear and nonlinear modelling abilities is a good
alternative for this problem. Following the well-established
linear and nonlinear modelling framework (Zhang, 2003;
Pai & Lin, 2005; Chen, 2011; Lee & Tong, 2011; Wang
et al., 2012; Zhu & Wei, 2013; Xiong et al., 2015), this study
builds a novel hybrid forecasting model ARIMATEF via
combining the ARIMA and the TEF model to improve
the forecasting accuracy. In the hybrid model, the real-
world time series fxi gNi1 is assumed to be composed of the
sum of the linear and nonlinear parts as follows:
xi l i nl i (3:1)
where li and nli are the linear and nonlinear part of the time
series data fxi gNi1 to be estimated by the ARIMA and the
TEF model, respectively.
Firstly, use the ARIMA to forecast the time series and
obtain the predicted results. We denote that li the forecasting
value of li through the ARIMA model. Let
i xi  ^l i (3:2)
which is called the residual containing nonlinear component
at time ti and can be forecasted by the TEF model using the
previous residual series. That is,
i f i ;


; il i (3:3) futures were all 506, while the data were 505 for the copper
where f is the nonlinear function modelled by the TEF and t
is the error. The i can be forecasted and obtain its predicted
result n^l i . Therefore, we can obtain the hybrid nal forecast.
^xt ^l t n^lt (3:4)
where ^l i is the ARIMA forecast value of the linear part li and
n^li is the TEF model forecast value of the nonlinear part nli.
Combined with the previous analysis, a one-step forecast
algorithm for any given time series fxi gNi1 can be concluded
as Algorithm 1:
Algorithm 1 The one-step ahead forecasting methodology
(ARIMATEF)
Input: fxi gti1 , where xi .
Output: bx t1 .
1. Training the ARIMA model on the time series dataset
fxi gti1 , select the parameters p, d and q for minimizing
mean absolute error (MAE).
2. Applying the ARIMA model obtained in the previous
t
step on the givenn time ot series fxi gi1 , obtain a linear
estimation result ^l i .
i1
3. Employing the trained ARIMA model, obtain one-step
ahead linear forecast value ^lt1 of the xt + 1.
2016 Wiley Publishing Ltd
4. Following equation (3.2), calculate the residual series
i ti1 , which represents the nonlinear components in
the time series fxi gti1 .
5. Training the TEF model on the residual series i ti1 ,
select the parameter h for minimizing MAE.
6. Employing the trained TEF model, make one-step ahead
nonlinear forecast value n^l t1 of the t + 1
7. performing the equation (3.4) and calculate the nal
forecasting value ^xt1 ^l t1 n^l t1 .
4. Experimentation design and results
4.1. Data description
Commodity prices are widely believed to inuence price
levels more broadly and thus are of interest to those whose
decisions depend on their expectations of future ination
(Gargano & Timmermann, 2014). The samples employed in
this study consist of historical, daily closing prices for several
representative commodity futures in the United States (oil,
wheat, soy bean, corn, gold and silver futures in Chicago Board
of Trade) and commodity futures in the Britain (copper and
aluminium futures in London Metal Exchange) from
WindDataBase. All the closing prices data sets of the futures
were for the nearest expiration contracts measured in US
dollars between January 19, 2011 and January 18, 2013.
Excluding public holidays, the authors learn that the lengths
of the time series for oil, wheat, soy bean, corn gold and silver
and aluminium futures. Figure 2 describes the curve of the daily
oil future prices and indicates that the future prices are highly
uncertain, nonlinear, dynamic and complicated. Furthermore,
in Table 1, the authors present a brief descriptive statistics
features of these future prices series: the mean, standard
deviation, Kurtosis, Skewness and JarqueBera test, etc. The
statistics relating to skewness, Kurtosis and JarqueBera test
all reveal that these futures prices are all non-normal.
115
oil future price
110
105
US dollars per barrel
100
95
90
85
80
75
0 50 100 150 200 250
date (day)
300 350 400 450 506
Figure 2: Original oil future price series from January 19,
2011 to January 18, 2013.
Expert Systems, October 2016, Vol. 33, No. 5 507
 0.397166
1.901548

0.000000
Aluminium

38.66530
In order to verify the effectiveness of the proposed

251.5635
2226.830
2160.500
2786.750
1837.000
algorithm, different ratios (90% and 70%) of these future

505
prices datasets are used as in-sample training sets and the
remaining values (10% and 30%) as out-of-sample testing sets,
respectively. The training data set is used exclusively to
develop the forecasting model and the test sample set to
evaluate the forecasting ability of the forecasting model using

0.446017
2.070822
34.91017
different evaluation criteria. The detailed data compositions

798.9826
Copper
8358.996

6784.75
10161.75
for the training and testing datasets are given in Table 2.
8196.5

0
505
4.2. Forecasting evaluation criteria
Considering no single accuracy measurement can capture
the distributional features of the errors (Armstrong &
4.256417
0.795744
3.531055
33.27209

59.34652 Collopy, 1992; Mathews & Diamantopoulos, 1994;

Silver

32.735
48.46
26.35

0 DeLurgio, 1998; Goodwin & Lawton, 1999; Daz-Robles

506 et al., 2008; Xiong et al., 2013), the authors employ several
traditional performance measures to evaluate the prediction
performance of the trained forecasting models for the test
data. These criteria are MAE, root mean square error
-0.544236
2.838125

0.000003

(RMSE), mean absolute percentage error (MAPE), percent

25.53135
118.2565
1628.474
Gold

standard error of prediction (SEP) (Ventura et al., 1995)

1644.4
1891.9
1313.2

and Willmotts index of agreement (WIA). The related

506

denitions of these criteria are shown as follows:

1X l
M AE jai  yi j (4:1)
l i1
v
0.068843
2.073321

0.000096

u l
65.32318

18.50468

u1 X
686.6981
Corn

RMSE t a i  y i 2 (4:2)
685.5
838.2
535.4

l i1
506

l  
100X 
yi  ai 
MAPE (4:3)

l i1 ai 
100
0.385734
3.266146

0.000893
14.04141

Soy bean

SEP RMSE (4:4)

138.059
1387.284

y
Xl
1762.2
1103.4

a  y i 2
506
1383

i1 i
WIA 1  Xl (4:5)
i1
jai  yjjyi  yj2

In the previous formula, ai and yi represent the predicted

1.609501

result and measured value, and andy are the respective means.
44.85093
0.22013
Wheat
736.9941

100.9768
731.875

l is the number of data. In general, MAE, RMSE, MAPE and

579.25
940.2

SEP are adopted as the evaluation criterion of level prediction

0
506

to quantify the errors in the same units of the variance. The

SEP allows the comparison of the forecast from different
models and different problems because of its dimensionless
7.839859
0.117016
2.277688

0.002294

(Daz-Robles et al., 2008). The smaller the values of them, the

94.76251

12.15465
Table 1: Descriptive statistics

closer the values are predicted by a model or an estimator

94.685
Oil

75.67
113.73

approaching the actually observed ones, namely, a better

506

predictor are associated with smaller values. Besides, during

the analysis of the experimental results, the proportion of the
total variance in the outcomes explained by the model is also
described by the coefcient of determination (R2). In
Observations
JarqueBera
Testing data

regression, the R2 coefcient of determination is a statistical

Probability
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

measure of how well the regression line approximates the

Median
Mean

real-data points. An R2 of 1 indicates that the regression line

perfectly ts the data (DeLurgio, 1960).

508 Expert Systems, October 2016, Vol. 33, No. 5 2016 Wiley Publishing Ltd
Table 2: Sample compositions in four data sets
Series Sample size Training set (size) Test set (size)

Oil 506 Jan. 19, 2011Nov. 6, 2012 (456) Nov. 7, 2012Jan. 18, 2013 (50)
506 Jan. 19, 2011Jun. 14, 2012 (355) Jun. 15, 2012Jan. 18, 2013 (151)
Wheat 506 Jan. 19, 2011Nov. 6, 2012 (456) Nov. 7, 2012Jan. 18, 2013 (50)
506 Jan. 19, 2011Jun. 14, 2012 (355) Jun. 15, 2012Jan. 18, 2013 (151)
Soy bean 506 Jan. 19, 2011Nov. 6, 2012 (456) Nov. 7, 2012Jan. 18, 2013 (50)
506 Jan. 19, 2011Jun. 14, 2012 (355) Jun. 15, 2012Jan. 18, 2013 (151)
Corn 506 Jan. 19, 2011Nov. 6, 2012 (456) Nov. 7, 2012Jan. 18, 2013 (50)
506 Jan. 19, 2011Jun. 14, 2012 (355) Jun. 15, 2012Jan. 18, 2013 (151)
Gold 506 Jan. 19, 2011Nov. 6, 2012 (456) Nov. 7, 2012 Jan. 18, 2013 (50)
506 Jan. 19, 2011Jun. 14, 2012 (355) Jun. 15, 2012Jan. 18, 2013 (151)
Silver 506 Jan. 19, 2011Nov. 6, 2012 (456) Nov. 7, 2012Jan. 18, 2013 (50)
506 Jan. 19, 2011Jun. 14, 2012 (355) Jun. 15, 2012Jan. 18, 2013 (151)
Copper 505 Jan. 19, 2011Nov. 6, 2012 (455) Nov. 7, 2012Jan. 18, 2013 (50)
505 Jan. 19, 2011Jun. 14, 2012 (354) Jun. 15, 2012Jan. 18, 2013 (151)
Aluminium 505 Jan. 19, 2011Nov. 6, 2012 (455) Nov. 7, 2012Jan. 18, 2013 (50)
505 Jan. 19, 2011Jun. 14, 2012 (354) Jun. 15, 2012Jan. 18, 2013 (151)

4.3. The models parameters determination
The future prices are varied with daily changes featured by
strong non-stationarity. Because the ARIMA model is only
t to a stationary time series, an initial differencing step
(corresponding to the integrated part of the model) can
be applied to remove the non-stationarity. The Akaike
Information Criterion is used to identify the best model.
By trial and error, the optimal ARIMA models generated
from the different ratios of the several future price datasets
are listed in Tables 3 and 4.
For the SVM, the appropriate parameters can improve
the generalization of the learning machine. In this study,
the poly function is selected as the kernel function, and the
parameters C and e of the model for all the experimental
future prices are adjusted based on the principle of
minimizing the MAE of the model (Daz-Robles et al.,
2008), presented in the Tables 3 and 4. In addition,
according to the point of view of Zhu and Wei (2013), the
authors determine the dimension p of the input data Xt =
(t  1, t  2, , t  p) of SVM by the autoregressive order
in the ARIMA(p, d, q) mode.

Table 3: Parameters of different models on 10% testing set

ARIMASVM ARIMATEF

Oil p = 3, d = 1, q = 3, C = 1, e = 1 p = 3, d = 1, q = 3, h = 55
Wheat p = 3, d = 1, q = 2, C = 1, e = 1 p = 3, d = 1, q = 2, h = 60
Soy bean p = 2, d = 1, q = 2, C = 2, e = 1 p = 2, d = 1, q = 2, h = 60
Corn p = 2, d = 1, q = 3, C = 2, e = 1 p = 2, d = 1, q = 3, h = 60
Gold p = 2, d = 1, q = 2, C = 1.2, e = 0.9 p = 2, d = 1, q = 2, h = 65
Silver p = 2, d = 1, q = 1, C = 2, e = 1 p = 2, d = 1, q = 1, h = 60
Copper p = 3, d = 1, q = 3, C = 1, e = 1 p = 3, d = 1, q = 3, h = 55
Aluminium p = 2, d = 1, q = 1, C = 1, e = 1 p = 2, d = 1, q = 1, h = 60
ARIMASVM, autoregressive integrated moving average and support vector machine; ARIMATEF, autoregressive integrated moving average
and Taylor Expansion Forecasting.

Table 4: Parameters of different models on 30% testing set

ARIMASVM ARIMATEF

Oil p = 2, d = 1, q = 2, C = 1, e = 1 p = 2, d = 1, q = 2, h = 60
Wheat p = 3, d = 1, q = 3, C = 1, e = 1 p = 3, d = 1, q = 3, h = 55
Soy bean p = 3, d = 1, q = 2, C = 2, e = 1.1 p = 3, d = 1, q = 2, h = 60
Corn p = 3, d = 1, q = 2, C = 3, e = 1 p = 3, d = 1, q = 2, h = 55
Gold p = 2, d = 1, q = 2, C = 1, e = 1 p = 2, d = 1, q = 2, h = 60
Silver p = 2, d = 1, q = 2, C = 3, e = 1 p = 2, d = 1, q = 2, h = 60
Copper p = 2, d = 1, q = 2, C = 2, e = 1 p = 2, d = 1, q = 2, h = 55
Aluminium p = 2, d = 1, q = 1, C = 2, e = 1 p = 2, d = 1, q = 1, h = 60
ARIMASVM, autoregressive integrated moving average and support vector machine; ARIMATEF, autoregressive integrated moving average
and Taylor Expansion Forecasting.

2016 Wiley Publishing Ltd Expert Systems, October 2016, Vol. 33, No. 5 509
 Figure 3 presents MAE values of the hybrid the valve of MAE decreases rapidly with h increasing
ARIMATEF methodology corresponding to the parameter before reaching the optimization point of 1/55, and as
h value of the TEF model on different datasets. In the value of h continues to increase, the MAE of the
statistics, the MAE is used to measure how close forecasts ARIMATEF forecasting results do not further slide but
or predictions are to the eventual outcomes. As shown in maintain at a certain level with a slight uctuation. This
Figure 2, in the case of 10% of oil future price testing set, result indicates that the forecasting model ARIMATEF

2 2.8

2.6
Mean Absolute Error (MAE)

1.8

Mean Absolute Error (MAE)

2.4

1.6 2.2

2
1.4
1.8

1.2 1.6

1.4
1
1.2

0.8 1
1/70 1/55 1/45 1/40 1/35 1/30 1/25 1/75 1/601/55 1/45 1/40 1/35 1/30
h h

Figure 3: Mean absolute percentage error (MAE) of autoregressive integrated moving average and Taylor Expansion
Forecasting model with different parameter h.

98 96

96
Modeled Gold Future Price

94
94
Oil Future Price

92
92

90 90

88
88
86
86
84

82 84
0 10 20 30 40 50 84 86 88 90 92 94 96
Prediction Set Actual Gold Future Price

105 100
Modeled Gold Future Price

100
95
Oil Future Price

95
90
90

85
85

80
80

75 75
0 25 50 75 100 125 150 75 80 85 90 95 100
Prediction Set Actual Gold Future Price

Figure 4: Time series and scatter plots of daily original oil future prices with forecasted ones by autoregressive integrated moving
average and support vector machine (ARIMASVM) and autoregressive integrated moving average and Taylor Expansion
Forecasting (ARIMATEF). The lines in the scatter plots represent linear regression lines.

510 Expert Systems, October 2016, Vol. 33, No. 5 2016 Wiley Publishing Ltd
that can converge rapidly with h is staying at a relatively
stable interval. As discussed previously, h should be small
to guarantee the accuracy of the differentiator. It is,
however, that the differentiator becomes more insensitive
to high-frequency noise as h goes to zero. Hence, there is
a trade-off between the tracking accuracy and the noise
toleration, and the choice of h depends on the experimental
data. Some specic settings of the parameter h are listed in
Tables 3 and 4.
4.4. Experimental results
This section reports the experimental results. The ARIMA
model is established with the Eviews (Version6.0),
produced by the Quantitative Micro Software corporation,
while the simulation with the SVM is performed by
introducing WEKA 3 toolbox (developed by the
University of Waikato, New Zealand) and the Taylor
expansion forecasting model is developed by MATLAB,
produced by the Mathworks Laboratory Corporation.
The estimated results on the different future price series
are similar, and experimental result of the oil future is
employed in the following analysis.
The actual and predicted values provided by the two
hybrid models on different ratios of the oil future price
dataset are presented in Figure 4. The point-to-point
comparisons of the experimental results (Figure 4(a) and
(c)) show that the tting values of the ARIMATEF

Table 5: Performance comparison on 10% testing sample size

MAE MAPE RMSE WIA SEP

Oil ARIMASVM 1.009011 1.138186 1.302891 0.954081 1.459920

ARIMATEF 0.836160 0.942360 0.969798 0.969798 1.217591
Wheat ARIMASVM 8.652815 1.045811 10.75393 0.986294 1.31388396
ARIMATEF 5.739791 0.704931 7.64003 0.993202 0.93343669
Soy bean ARIMASVM 13.16859 0.917355 17.92699 0.937918 1.25300949
ARIMATEF 10.41991 0.730895 13.21264 0.967434 0.92349939
Corn ARIMASVM 6.259969 0.864372 7.551768 0.971811 1.04407279
ARIMATEF 4.425204 0.614458 5.791064 0.983947 0.80064595
Gold ARIMASVM 7.502658 0.442401 10.039095 0.969306 0.591931
ARIMATEF 7.413046 0.436839 9.298504 0.974817 0.548264
Silver ARIMASVM 0.332304 1.040035 0.418906 0.974631 1.30947381
ARIMATEF 0.230778 0.724665 0.285899 0.98883 0.89370261
Copper ARIMASVM 61.10567 0.756731 80.19316 0.945171 1.01225235
ARIMATEF 52.48895 0.648645 64.41928 0.965541 0.81314373
Aluminium ARIMASVM 19.95401 0.952813 27.84308 0.952069 1.35775994
ARIMATEF 17.64447 0.840733 23.78068 0.966478 1.15965807
ARIMASVM, autoregressive integrated moving average and support vector machine; ARIMATEF, autoregressive integrated moving average
and Taylor Expansion Forecasting; MAE, mean absolute error; RMSE, root mean square error; MAPE, mean absolute percentage error;
WIA, Willmotts index of agreement; SEP, standard error of prediction.

Table 6: Performance comparison on 30% testing sample size

MAE MAPE RMSE WIA SEP

Oil ARIMASVM 1.441800 1.619349 1.835592 0.956335 2.042644

ARIMATEF 1.121012 1.257105 1.400932 0.975145 1.558955
Wheat ARIMASVM 12.69989 1.517837 16.49783 0.982893 1.954397
ARIMATEF 9.177549 1.089095 12.42827 0.990174 1.472301
Soy bean ARIMASVM 18.49713 1.198798 24.04017 0.988424 1.567922
ARIMATEF 14.47236 0.940876 18.64128 0.993077 1.215801
Corn ARIMASVM 11.05631 1.534577 14.91971 0.983289 2.016412
ARIMATEF 8.787177 1.210936 11.78222 0.989543 1.592378
Gold ARIMASVM 9.111308 0.544668 12.509227 0.980355 0.745035
ARIMATEF 7.492380 0.447127 9.615850 0.994366 0.572709
Silver ARIMASVM 0.33578 1.089005 0.455701 0.992326 1.471489
ARIMATEF 0.265055 0.858851 0.344308 0.99563 1.111795
Copper ARIMASVM 67.79504 0.870927 89.59409 0.974563 1.14514
ARIMATEF 54.44996 0.697545 67.67018 0.985855 0.864921
Aluminium ARIMASVM 20.26977 1.021324 25.84553 0.981005 1.301883
ARIMATEF 15.273978 0.766806 19.65335 0.989348 0.989973
ARIMASVM, autoregressive integrated moving average and support vector machine; ARIMATEF, autoregressive integrated moving average
and Taylor Expansion Forecasting; MAE, mean absolute error; RMSE, root mean square error; MAPE, mean absolute percentage error;
WIA, Willmotts index of agreement; SEP, standard error of prediction.

2016 Wiley Publishing Ltd Expert Systems, October 2016, Vol. 33, No. 5 511
model are closer to the real data than those of the
ARIMASVM model for the different testing datasets,
and it can be seen clearly from the graph that the
proposed ARIMATEF model has greater capability to
detect the local extremum points than the ARIMASVM
model. The main reason is that the ARIMATEF model
enjoys the property to be insensitive to the noise
disturbance in dealing with the complex time series data,
and in Figure 4(b) and (d), the estimated values of the
hybrid ARIMATEF model cluster around the perfect
coefcient of determination (R2 = 1) while the scatter plot
for ARIMASVM is more dispersed. That is to say about
more than 88% of the explained variance between the
observed and estimated future datasets in the forecasting
phase is captured by the hybrid ARIMATEF model,
which reveals a powerful analysing capability of the new
hybrid model to the future time series data forecasting
problem.
The detailed statistical results are listed in the Tables 5
and 6. Compared with the ARIMASVM, the ARIMATEF
model performed much better in different ratios of testing
sets by all criteria. For out-of-sample precision
comparisons, the MAE of the ARIMASVM model is at
1.0090 and 1.4418, whereas that of the ARIMATEF is
much lower, at 0.8362 and 1.1210, respectively. Similar
results are also obtained from other level prediction
indicators. All these statistical indices listed in the Tables 5
and 6 indicate that the ARIMATEF model boasts
outstanding capability to forecast the future price series.
To evaluate the robustness of the ARIMATEF model,
the authors test the performance of the different models on
several other representative commodities future prices.

Figure 5: Time series and scatter plots of several representative future daily prices (wheat, soy bean, corn, gold, silver, aluminum
and copper) with forecasted ones by autoregressive integrated moving average and support vector machine (ARIMASVM) and
autoregressive integrated moving average and Taylor Expansion Forecasting (ARIMATEF) on the 10% testing set. The lines in
the scatter plots represent linear regression lines.

512 Expert Systems, October 2016, Vol. 33, No. 5 2016 Wiley Publishing Ltd
Similarly, two relative ratios of 70% and 90% are considered
as training set. The point-to-point comparisons of results
and scatter plots are plotted in Figures 5 and 6, and the
forecasting performances of the different two models are
summarized in Tables 5 and 6. It can be observed again that
the ARIMATEF model has much better out-of-sample
forecasting accuracy because of smaller MAE, RMSE,
MAPE, SEP and larger WIA and R2 values on different
future price datasets, which demonstrates that the
ARIMATEF model is a preferable hybrid model and can
be quite robust in terms of producing more accurate
forecasting results for nancial time series forecasting
problem.
The possible explanations of the ARIMATEF models
superiority to the ARIMASVM could be twofold: on one
hand, besides the nonlinear model ability, the TEF model
expresses different relationships between the neighbouring
points with different time intervals in the time series data
by the notion of the weighted function, which overcomes
the shortcomings of the equivalence relationship expressed
by Euclidean distance in the SVM. This instinctive ability
of incorporating the time correlation improves the accurate
forecast performance of the ARIMATEF model. On the
other hand, different input variables affect the SVM
generalization ability signicantly. However, in real
application, the scope of the backtracking steps selected
as in the input variables is difcult to determine, which
makes the effort to use SVM in forecasting time series data
based on limited information a very difcult task. By
contrast, the TEF model can realize the dynamic
backtracking to the historical data by equation (2.36),
which avoids the difculty of back search for the best time
lags in the time series and makes full use of the historical
information hidden in the previous data. Additionally,

Figure 6: Time series and scatter plots of several representative future daily prices (wheat, soy bean, corn, gold, silver, aluminum
and copper) with forecasted ones by autoregressive integrated moving average and support vector machine (ARIMASVM) and
autoregressive integrated moving average and Taylor Expansion Forecasting (ARIMATEF) on the 30% testing set. The lines in
the scatter plots represent linear regression lines.

2016 Wiley Publishing Ltd Expert Systems, October 2016, Vol. 33, No. 5 513
compared with other methods, the tracking differentiator is
more feasible in extracting the derivatives of the time series
data even if the specic model of the target is unknown
(Guo et al., 2002; Ibrir, 2004; Davila et al., 2005).
Therefore, the hybrid methodology not only exploits the
unique strength of the individual models but also develops
a more powerful hybrid model that can improve the
comprehensive analysing ability to the time series data with
complex characteristics. Therefore, considering the superior
performance of the ARIMATEF forecasts, investors could
develop an effective decision support system based on this
forecasting model to improve the investment efciency.
5. Conclusions
A novel hybrid model ARIMATEF incorporating ARIMA
and TEF models is proposed to forecast the nancial time
series. The main highlight of our works lies in that
1. We propose a new TEF model based on the tracking
differentiator to predict the nonlinear components of the
time series dataset. Compared with the SVM, the TEF
forecasting model incorporates the time correlation
knowledge and makes full use of the historical information
in the time series data to improve the forecasts accuracy,
and the one-parameter setting work of the TEF model
simplies its application in real situations.
2. The novel hybrid model ARIMATEF enjoys superior
ability to detect directional change and is robust in
dealing with different time series because of the factor
that the tracking differentiator is insensitive to the noise
disturbance in extracting the specic derivatives of the
time series trajectories. The empirical results show that
the hybrid model can produce lowest level evaluations
and highest index of agreement and R2 values on the
different future price datasets.
3. This study, motivated by the evidence that different
forecasting models can complement each other in
modelling complex data sets, develops a novel hybrid
methodology ARIMATEF via combining the ARIMA
and TEF models. In the hybrid model, the ARIMA
model is applied to capture linear patterns hidden in the
time series data, whilst the TEF model is used to capture
nonlinear patterns in the data. Experimental results
obtained by running on real future datasets show that
the proposed hybrid methodology ARIMATEF greatly
improves prediction performance.
The literatures show that there is no universal model
applicable to any environment. The proposed model in this
paper is designed to improve the forecasting accuracy from
the data driven prospective by incorporating the intrinsic
characteristics of the historical nancial time series data.
Considering the special environment in crisis, some new
events driven forecasting models, which incorporate
important information such as the differential signal of the
market behaviour and the linkage or contagion effect
514 Expert Systems, October 2016, Vol. 33, No. 5
between different nancial markets and so on through some
specic learning mechanism, should be more reasonable.
Additionally, as a new proposed model, some problems
should be addressed in the future research. Firstly, only
several commodity future price datasets are used as
illustrative examples to evaluate the performances of the
ARIMATEF model in this study. Therefore, using the
proposed methodology for other kinds of nancial time series
is subject to future investigations. Yet, the problem of making
multi-step ahead forecasts based on the TEF model is still
open for both theoretical and applied research. Finally, the
tracking differentiator is applied to extract the derivatives
from the given series in this paper. However, some recent
studies propose alternative evolutionary approaches, such as
the study of Su et al. (2005) and the study of Guo and Zhao
(2011). Thus, in the future, a novel TEF model with a new
tracking differentiator to approach the derivatives of the time
series trajectory could be investigated.
Acknowledgements
We would like to express our sincere appreciation to the
reviewers for their valuable comments, which have greatly
helped us improve the paper quality. This work also
obtained foundation from the following two projects:
National Natural Science Foundation of China (No.
71371113) and Humanity & Social Science Foundation by
the Ministry of Education of China (No. 13YJA790154).
Appendix A: Introduction to the tracking differentiator
Although the tracking differentiator is widely used in
control theory and practice, to our best knowledge, it has
not been used in the forecasting of nancial time series.
Therefore, the tracking differentiator is a new mathematical
tool in forecasting nancial time series. In control practice,
when the signal is corrupted by noise, the derivative of the
usually rapidly varying noise will drown out the derivative
of the signal. For example, assume that the sinusoidal signal
is corrupted by some Gauss noises (t) of standard normal
distribution N 0; 1 with intensity , that is,
u sin t t (4:6)
The simulation of differentiating signal u directly is
plotted in Figure 6 (left). It is seen that the derivative of
noise drown out the derivative of the signal even if the
intensity is small.
The tracking differentiator is designed to extract the
derivative of given signals corrupted by some noise. Much
research has contributed to differential trackers like high-
gain observer-based differentiator (Dabroom & Khalil,
1999; Guo & Zhao, 2013), the super-twisting second-order
sliding-mode algorithm (Davila et al., 2005), linear time-
derivative tracker (Guo et al., 2002; Ibrir, 2004) and robust
exact differentiation (Levant, 1998), name just a few.
2016 Wiley Publishing Ltd
 More specially, if we assume that f make the following
free system

Transactions on Automatic Control, 50, 17851789.
y_ 1 y2
(4:7)
y_ 2 f y1 ; y2
be globally stable in the sense that limt yi 0; i 1; 2,
then system
8 DAZ-ROBLES, L.A., J.C. ORTEGA, J.S. FU, G.D. REED, J.C. CHOW,
< y_ 1 y2
1 (4:8)
: y_ 2 2 f y1  u; y2
satises, for any T > 0, (Su et al., 2005; Guo & Zhao, 2011)
T FENG, H.Y.P. and S.J. LI (2013) A tracking differentiator based on
0 jy1 t  utj jy2 t  u_ tjdt0 as 0 (4:9) Taylor expansion, Applied Mathematics Letters, 26, 735740.
Therefore, y1 and y2 can be regarded as an
approximation to u and :u: , respectively.
The main advantage of tracking differentiator lies in the
fact that it is noise tolerant. For example, we choose the
following linear form tracking differentiator of type (4.8):
8 GUO, B.Z., J.Q. HAN and F.B. XI (2002) Linear tracking-
< y_ 1 y2
2 2 (4:10)
: y_ 2  2 y1  u  y2
where the signal u is given by (4.6). The simulation of tracking
results is plotted in Figure 1 (right). It is easy to nd that the
tracking differentiator is robust to the small white noise.
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The authors
Guisheng Zhang
Guisheng Zhang is currently a lecturer at the School of
Economics and Management, Shanxi University, China.
Guisheng Zhang received his Bachelor degree and Master
degree in School of Computer and Information Technology,
Shanxi University, China, in 2000, 2007, respectively. Then
he obtained his PhD degree in School of Economics and
Management, Shanxi University, in 2016. His research
interests focus on nancial time series analysis and
forecasting.
Xindong Zhang
Xindong Zhang is currently a Professor at the School of
Economics and Management, Shanxi University, China,
where she obtained her Bachelor degree and Master degree
in Mathematics. Then she received her PhD degree in
Management from the Tianjin University of Finance and
Economics, China. Her research interests include asset
pricing and corporate nance.
Hongyinping Feng
Hongyinping Feng received the BSc degree, the MSc degree
and the PhD degree, in mathematics in 2003, 2006 and 2013,
respectively, all from Shanxi University, China. He was a
visiting scholar at University of the Witwatersrand, South
Africa from 2013 to 2014. He is currently a Professor in
the School of Mathematics Science, Shanxi University,
China. His research interests focus on distributed parameter
systems control.
2016 Wiley Publishing Ltd