Fuzzy Uncertainty Analysis in the Investment
Processes
Nebojša M. Ralević*, Vladimir Dj. Djaković**, Jelena S. Kiurski***, Goran B. Andjelić****
*
University of Novi Sad, Faculty of Technical Sciences, Department of Fundamental Sciences, Novi Sad, Serbia
** University of Novi Sad, Faculty of Technical Sciences, Department of Industrial Engineering and Management, Novi
Sad, Serbia
*** University of Novi Sad, Faculty of Technical Sciences, Department of Graphic Engineering and Design, Novi Sad,
Serbia
**** Educons University, Faculty of Business in Services, Sremska Kamenica, Serbia
E-mail: nralevic@uns.ac.rs, v_djakovic@uns.ac.rs, kiurski@uns.ac.rs, andjelic1975@gmail.com
Abstract—The analyses of the investment processes,
especially the possibility of monitoring and forecasting the
intense return fluctuations, demands usage of an
appropriate framework, which adequately evaluates the
dynamic nature of those processes. In the recessive business
conditions, volatility and extreme stock market movements
presents a challenge while evaluation of the investment
processes. Thus, the stock market prices volatility and the
possibility of stock market forecasting in an uncertain
environment are in the focus of the research. Fuzzy sets
allow usage of approximated values of the ambiguous data,
that is, the intraday stock market prices data. The sample
comprises stocks of Alfa plam a.d. Vranje (ALFA),
Komercijalna banka a.d. Beograd (KMBN) and Metalac
a.d. Gornji Milanovac (MTLC), that are traded at the
regulated market of the Belgrade Stock Exchange. The main
goal of the research is to present an overview and
performance test of the fuzzy sets as a part of soft
computing (SC) technology in the investment processes. The
research results indicate the necessity of the fuzzy sets
application in the forecasting of stock market prices, i.e. its
approximate values.
I. INTRODUCTION
While analyzing investment processes, it is especially
important to have an overview of both global and
domestic business environment with special attention on
the dynamic nature of changes and consequently growing
uncertainty. Thus, it is possible to perceive and
comprehend the nature of the investment processes in
terms of volatility of the observed stock market, i.e. the
changes of observed stock market prices and its unique
characteristics. Namely, the financial markets of transition
economies represent the typical conditions and
circumstances of these economies in terms of their relative
“shallowness”, insufficient liquidity and extreme volatility
[1].
The most important changes in the business sector
belong trade liberalization and movement of financial
capital, information and communication technological
processes, changes in international division of labour and
international trade, a huge concentration of capital
connected with qualitative and quantitative changes in the
size as well as in a character of enterprises [2].
Investment processes have the key role in „driving” the
economy – locally, regionally and globally. Main
characteristics of the investment processes is uncertainty,
having in mind that the final result of some investment
activity cannot be recognized until this activity is fully
closed, i.e. so called „closed position“. In that sense,
analyzing flow of investment processes, effects and results
of these activities is one of the most important tasks in the
hands of both policy makers and investors. Investment
processes in transition economies are very specific,
regardless characteristics of these markets and that is the
reason why it is very interesting to analyze and research
these activities especially in this environment. In this
article investment processes are analyzed in the view of
fuzzy uncertainty analysis as a part of soft computing (SC)
technology. The research is conducted with the stock
market prices data of the Belgrade Stock Exchange, as a
represent of the financial market conditions in the
Republic of Serbia, as a domestic economy-market. It is
well known fact that the financial markets of transitional
economies are extremely volatile, “shallow“, with the lack
of liquidity on it. These are the main reasons why this
research is focused on the Serbian financial market, and
the investment processes on it. Also, this research is pretty
original having in mind that there are no similar
researches, to authors knowledge, of usage of the fuzzy
analysis on the Serbian financial market.
Having in mind the volatility of the observed Serbian
financial market, it is especially important to continuously
monitor the investment processes. Hence, occurrence of
extreme events has a significant influence on the
profitability of the investments processes. Extreme values,
that is, extreme returns are a critical factor regarding
investment strategy optimization. The possibility to
measure risk and to adequately assess the complexion of
the investment processes is of outmost importance for
appropriate investment decision analyses. Consequently,
the development of the fuzzy based framework that will
not disregard stated extreme events that occur in the
investment processes, i.e. in the stock market business
operations, is a primary focus of both investors and risk
managers. Fuzzy systems are excellent for decision
making under uncertainty [3].
Standard methods of the investment processes
appraisal tend to underperform in uncertain business
conditions that result in unexpected market movements
characterized by large market shifts, that is, intense return
fluctuations. Such market movements mostly happen in
the residual time and directly affect the possibility of
financial market forecasting. It is especially challenging
due to the characteristics of financial return series.
Financial return series, in general, are leptokurtic with
thick tails on both distribution sides. Accordingly, the risk
associated is high and estimation of the investment
processes in uncertain environment is immanent. That
implies the necessity of the fuzzy sets usage, which allows
modeling uncertain market expectations in the investment
processes and also dealing with approximated values of
the ambiguous data. The stock market prices represent
such data and also are too volatile to appropriately manage
expected cash flows of the investment processes. That task
is even more complex if the existence of restricted market
information is validated. Namely, high level of insider
trading is one of the main characteristics of the investment
processes on the financial markets in transition
economies. Increasing the range of the uncertainty, i.e.
volatility, causes forecasting of stock market prices more
difficult and consequently adequate investment risk
appraisal. Effective fuzzy based framework validates all of
the stock market imperfections, underlying return
distribution and uncertainty when implementing fuzzy
procedure in absence of precise information, i.e. enables
research in areas involving high levels and diverse forms
of uncertainty. Such problems are the norm in finance [4].
In most cases, uncertainty is caused by the inherent
fuzziness of the tested parameters. An appropriate
estimation of the parameters of the investment processes
understand risk minimization, which is directly connected
to the necessary capital requirements for covering possible
losses in that processes. In that way, it is possible to create
predictable investment horizon and to maximize returns of
the investment activities. That is desirable for both
institutional investors and small investors as active
participants on the financial markets. Also, further growth
and development of the financial markets in the transition
economies is enabled, which has a positive influence on
the entire business climate, i.e. on the investment
processes and consequently on the possibility of
investment portfolio diversification.
Using fuzzy techniques tends to reduce the magnitude
of errors and as a result yields better forecasts and fitting
for decision making in the prediction of stock market
prices [5].
Hence, the research goal is to perform a detail analysis
of fuzzy sets application as a part of soft computing (SC)
technology in volatile business conditions with special
attention to the possibility of the forecasting of stock
market prices. Namely, both theoretical and practical
usage (performance analysis) of the fuzzy sets is
examined in function of the investment processes
optimization at the Belgrade Stock Exchange. The main
motivation of this research is to identify the initial basis
for the creation of the fuzzy based framework in the
investment processes. The research results will present the
basis for the fuzzy sets application and, as such, should
help both academics and practitioners in the subject
matter. The novelties in the paper understand acquiring
further empirical results of the possibility of the fuzzy sets
application in the investment processes (particularly in the
transition economies) that are quite complex and specific,
especially having in mind the unexpected (extreme)
movement of the analyzed Serbian stock market in an
uncertain environment.
The rest of the paper is organized as follows. In Section
II the data are described with special attention on the main
characteristics of the standard listing at the regulated
market of the Belgrade Stock Exchange. Section III
presents the results and discussion, while Section IV
concludes.
II. DATA
The data used in the research comprise stocks which are
traded at the regulated market of the Belgrade Stock
Exchange, i.e. the standard listing segment. Stocks of Alfa
plam a.d. Vranje (ALFA), Komercijalna banka a.d.
Beograd (KMBN) and Metalac a.d. Gornji Milanovac
(MTLC) are included in the standard listing and were
continuously traded on the Belgrade Stock Exchange
between 26.03.2012 and 29.06.2012. The data used in the
research is collected from the Belgrade Stock Exchange
official Internet site [6]. The reason why these stocks are
included in the research lies in the fact that these stocks
can, in the best way, represent the conditions on the
Serbian financial market i.e. the Belgrade Stock
Exchange. As already mentioned, these are the stocks that
are continuously traded on the exchange and in that sense
these stocks can be called „liquid“. The Belgrade Stock
Exchange is organized in accordance with the actual law
and completely is in accordance with the EU regulations
about exchanges. This fact is very important, because it
provides a solid basis for correct information about
conditions on the market (market prices, trade volume,
etc). Having all this in mind, it can be concluded that the
representative sample is used in the research.
Trading at the Belgrade Stock Exchange is organized
within the fluctuation zone range determined for each
individual market segment separately. Absolute
fluctuation zone (AZF) is determined uniquely in the
range of +/- 10%, for securities traded on the regulated
market listings, that is, on the standard listing [7].
Previously mentioned range is set according to the Rules
of business operations of the Belgrade Stock Exchange in
function of protection the investment of the investors and
also increasing confidence in the stock market stability. In
that way investors, both domestic and foreign, can be
certain that their investment, i.e. the entire investment
portfolio, will be risk protected to some extent. Hence, the
fluctuation zone prevents over extensive risk exposure in
the investment processes. This is especially significant for
investors that conduct their business operations on the
daily basis. Also, the fluctuation zone is useful to the
investors that implement the simple “buy and hold”
investment strategy.
The issuer of securities being admitted to standard
listing, as well during the period of listing of the security
on standard listing, must fulfill the following general
conditions [8]:
1) Minimal amount of issuer’s capital – EUR 4 mil;
2) Report on audit of annual financial report prepared in
accordance with the law governing accounting and audit –
with expressed unqualified or qualified opinion;
3) Issuer’s webpage – created both in Serbian and
English language.
As it can be seen from the previous, general conditions
for securities admittance to standard listing of the
Belgrade Stock Exchange are strict, which gives an
additional confidence to investors about trading with that
securities. Namely, the historical and present data, 01.06.2012 6,840 1,548 1,551
including latest companies’ financial reports are 31.05.2012 6,849 1,610 1,551
continuously available. Thus, the investment processes 30.05.2012 6,850 1,600 1,630
conducted at the standard listing are performed with 29.05.2012 6,850 1,605 1,630
28.05.2012 6,850 1,605 1,630
increased transparency and reduced risk.
25.05.2012 6,850 1,650 1,630
In addition, the following special conditions must be 24.05.2012 6,850 1,650 1,630
met [8]: 23.05.2012 6,850 1,729 1,630
1) That in the free float there is at least 25% of total 22.05.2012 6,976 1,729 1,630
number of issued shares, not including the following 21.05.2012 6,851 1,735 1,617
18.05.2012 6,850 1,735 1,610
shares:
17.05.2012 6,850 1,710 1,610
- of persons owning individually more than 5% of 16.05.2012 6,850 1,710 1,696
shares of the total number of shares issued by the issuer, 15.05.2012 6,850 1,710 1,695
excluding shares owned by investment and pension funds, 14.05.2012 6,850 1,785 1,695
as well as other shares in custody accounts, fund 11.05.2012 6,850 1,785 1,671
management companies, insurance companies, investment 10.05.2012 6,850 1,785 1,695
companies and other investment companies with short- 09.05.2012 6,850 1,703 1,680
term investment strategies; 08.05.2012 6,850 1,773 1,670
07.05.2012 6,900 1,773 1,670
- owned by the international and foreign organizations 04.05.2012 6,999 1,756 1,670
and institutions for development; 03.05.2012 7,000 1,673 1,670
- owned by the Republic of Serbia including shares 30.04.2012 7,000 1,610 1,670
owned by bodies, organizations and institutions 27.04.2012 7,000 1,645 1,665
established by special laws by the Republic of Serbia 26.04.2012 7,000 1,645 1,665
(agencies, funds, etc.); 25.04.2012 7,000 1,645 1,634
24.04.2012 7,100 1,645 1,630
2) That the dividends per preference shares have been 23.04.2012 7,100 1,650 1,630
paid, if issued – in the way prescribed by the decision on 20.04.2012 7,100 1,645 1,630
their issue. 19.04.2012 7,100 1,690 1,630
Having in mind all strict conditions that must be met, 18.04.2012 7,100 1,690 1,650
only three companies that issued securities are listed on 17.04.2012 7,100 1,650 1,650
12.04.2012 7,100 1,750 1,650
the Belgrade Stock Exchange within the standard listing.
11.04.2012 7,100 1,750 1,650
Alfa plam a.d. Vranje is a metal industry company with 10.04.2012 7,100 1,750 1,650
dominant export orientation, especially to the following 09.04.2012 7,150 1,750 1,650
countries: Bosnia and Herzegovina, Croatia, Slovenia, 06.04.2012 7,150 1,793 1,650
Macedonia, Bulgaria, Albania, Italy, Russia and Hungary. 05.04.2012 7,150 1,800 1,656
Komercijalna banka a.d. Beograd is a bank with active 04.04.2012 7,150 1,800 1,656
domestic and international business operations and is one 03.04.2012 7,150 1,800 1,680
of the oldest members of the Belgrade Stock Exchange. 02.04.2012 7,194 1,800 1,680
Metalac a.d. Gornji Milanovac is a production and trading 30.03.2012 7,200 1,800 1,690
company organized as a holding with large market share 29.03.2012 7,200 1,796 1,676
in the Republic of Serbia. 28.03.2012 7,200 1,785 1,630
27.03.2012 7,200 1,682 1,630
Therefore, standard listing stock data of Alfa plam a.d. 26.03.2012 7,200 1,682 1,650
Vranje (ALFA), Komercijalna banka a.d. Beograd Source: [6]
(KMBN) and Metalac a.d. Gornji Milanovac (MTLC)
provide a sound basis for the research.
TABLE II.
The standard listing data of ALFA, KMBN and MTLC THE STANDARD LISTING DATA – PERIOD: 25.06.-29.06.2012
are presented in Table I and Table II.
Date ALFA KMBN MTLC
29.06.2012 6,500 1,421 1,601
TABLE I. 28.06.2012 6,500 1,426 1,650
THE STANDARD LISTING DATA – PERIOD: 26.03.-22.06.2012 27.06.2012 6,500 1,425 1,601
Date ALFA KMBN MTLC 26.06.2012 6,500 1,500 1,601
22.06.2012 6,500 1,500 1,601 25.06.2012 6,500 1,500 1,601
21.06.2012 6,500 1,500 1,610 Source: [6]
20.06.2012 6,500 1,532 1,601
19.06.2012 6,500 1,532 1,601 III. RESULTS AND DISCUSSION
18.06.2012 6,500 1,559 1,601
15.06.2012 6,500 1,559 1,600 The application of the fuzzy sets is especially
14.06.2012 6,500 1,559 1,550 challenging in the field of prediction in terms of the future
13.06.2012 6,500 1,648 1,530 stock market price movement, i.e. volatility. The dilemma
12.06.2012 6,779 1,648 1,532 is, whether it is possible to assess the future stock market
11.06.2012 6,787 1,648 1,532 price movement in some degree, even when processing
08.06.2012 6,840 1,648 1,532 imprecise market data?
07.06.2012 6,840 1,648 1,532
Suppose that in different time x i the data in the paper
06.06.2012 6,840 1,648 1,551
05.06.2012 6,840 1,648 1,553 are presented by symmetric trapezoidal fuzzy numbers
04.06.2012 6,840 1,548 1,550 Pi = ( l i , m i , n i , ri ) .
 It is necessary to establish a following connection: C13={1/1690, 0.992/1676, 0.964/1630, 0.976/1650}
P = A + x B , A = ( a l , a m , a n , a r ) , B = ( bl , b m , b n , b r ) , Source: Author’s calculations
which determines a fuzzy value for P = ( l , m , n , r ) , at Due to the simplification and adequate consideration,
the obtained fuzzy sets are transferred into symmetric
time x . Suppose that a l = 0 .9 a m , a r = 1 .1a n ,
trapezoidal fuzzy numbers A = ( a l , a m , a n , a r ) , where
bl = 0 .9 bm , br = 1 .1bn , li = 0 .9 m i and ri = 1 .1ni .
al = 0 .9 a m and a r = 1 .1a n , whose core
Using the classical normal equations, the following
J ( A ) = [a m , a n ] , that is:
connections are obtained:
TABLE VI.
am =
∑m i
, b =
∑xm i i
.
THE SYMMETRIC TRAPEZOIDAL FUZZY NUMBERS (CORE) - ALFA PLAM
A.D. VRANJE (ALFA)
∑x
m 2
n i
(1) J(A1)=[6500,6500] J(A2)=[6779,6787]

an =
∑ ni , b =
∑xn . i i
J(A3)=[6840,6840]
J(A5)=[6976,6900]
J(A4)=[6840,6850]
J(A6)=[6850,6850]
∑x
n 2
n i J(A7)=[6850,6900] J(A8)=[6999,7000]
J(A9)=[7050,7100] J(A10)=[7100,7100]
J(A11)=[7100,7150] J(A12)=[7150,7194]
Corresponding fuzzy sets are joined to the stock market J(A13)=[7200,7200]
prices (The standard listing, see Table I), from one week Source: Author’s calculations
during the entire sample period (13 weeks), that is:
TABLE VII.
TABLE III. THE SYMMETRIC TRAPEZOIDAL FUZZY NUMBERS (CORE) -
THE FUZZY SETS – THE STOCK MARKET PRICES OF ALFA PLAM A.D. KOMERCIJALNA BANKA A.D. BEOGRAD (KMBN)
VRANJE (ALFA)
J(B1)=[1559,1559] J(B2)=[1648,1648]
A1={1/6500} A2={0.958/6500, 0.999/6779, J(B3)=[1648,1648] J(B4)=[1600,1600]
1/6787} J(B5)=[1729,1735] J(B6)=[1785,1785]
A3={1/6840} A4={0.999/6840, 1/6849, 1/6850} J(B7)=[1773,1785] J(B8)=[1756,1756]
A5={1/6976, 0.982/6851, A6={1/6850} J(B9)=[1645,1650] J(B10)=[1690,1690]
0.982/6850} J(B11)=[1750,1750] J(B12)=[1793,1800]
A7={0.993/6850, 1/6900} A8={1/6999, 1/7000} J(B13)=[1785,1800]
A9={0.986/7000, 1/7100} A10={1/7100}
Source: Author’s calculations
A11={0.993/7100, 1/7150} A12={0.994/7150, 1/7194}
A13={1/7200}
Source: Author’s calculations TABLE VIII.
THE SYMMETRIC TRAPEZOIDAL FUZZY NUMBERS (CORE) - METALAC
A.D. GORNJI MILANOVAC (MTLC)
TABLE IV.
THE FUZZY SETS – THE STOCK MARKET PRICES OF KOMERCIJALNA J(C1)=[1601,1610] J(C2)=[1600,1600]
BANKA A.D. BEOGRAD (KMBN) J(C3)=[1550,1553] J(C4)=[1630,1630]
J(C5)={1617,1630] J(C6)=[1695,1696]
B1={0.962/1500, 0.983/1532, B2={0.946/1559, 1/1648} J(C7)=[1680,1695] J(C8)=[1670,1670]
1/1559} J(C9)=[1665,1665] J(C10)=[1650,1650]
B3={1/1648, 0.939/1548} B4={0.961/1548, 1/1610, J(C11)=[1650,1650] J(C12)=[1680,1680]
0.994/1600, 0.997/1605}
J(C13)=[1676,1690]
B5={0.951/1650, 0.996/1729, B6={0.972/1735, 0.958/1710,
1/1735} 1/1785} Source: Author’s calculations
B7={1/1785, 0.954/1703, B8={1/1756, 0.953/1673, Using (1), the following is obtained:
P = A + xB = [am , an ] + x[bm , bn ]
0.993/1773} 0.917/1610}
B9={0.997/1645, 1/1650} B10={0.973/1645, 1/1690, (2)
0.976/1650}
For x=7, the predicted ALFA, KMBN and MTLC stock
B11={1/1750} B12={0.996/1793, 1/1800}
B13={1/1800, 0.998/1796, 0.992/1785, 0.934/1682}
market price for the period 25.06.-29.06.2012 is as
follows:
Source: Author’s calculations
J ( P ALFA ) = [6941 + 7 * 45,6952 + 7 * 48] = [7256 ,7288 ]
TABLE V. J ( P KMBN ) = [1705 + 7 *14,1708 + 7 *15] = [1803,1813]
THE FUZZY SETS – THE STOCK MARKET PRICES OF METALAC A.D.
GORNJI MILANOVAC (MTLC) J ( P MTLC ) = [1643 + 7 * 8,1648 + 7 * 8] = [1699,11704] .
C1={0.994/1601, 1/1610 } C2={1/1600, 0.967/1550,
0.956/1530, 0.958/1532} IV. CONCLUSION
C3={0.986/1532, C4={0.952/1551, 1/1630}
0.999/1551, 1/1553, The research results indicate that calculated
0.998/1550} approximated values for prediction of the stock market
C5={1/1630, 0.992/1617} C6={0.949/1610, 1/1696, 1/1695} prices movement of ALFA, KMBN and MTLC have
C7={0.986/1671, 1/1695, C8={1/1670} greater values than actual for the period 25.06.-
0.991/1680, 0.985/1670} 29.06.2012. This result can be interpreted due to existing
C9={1/1665, 0.981/1634, C10={0.988/1630, 1/1650} stock market conditions, where there is a low trading
0.979/1630}
activity for several consecutive days (this situation
C11={1/1650} C12={0.982/1650, 0.986/1656,
1/1680}
presents the limitation of the research). In that way, there
are no significant changes in the stock market prices of
each tested stock. Thus, the application of the fuzzy sets
implies consideration of additional factors in the
calculation, e.g. liquidity and trading volume of the tested
stocks. Also, the calculation period should be modified to
correspond to a greater extent to the recessive business
conditions.
The results of the research are very significant both for
the academic and the professionals, because they provide
a new view on the usage of the fuzzy analysis in the
investment processes in the transitional markets. Also,
there are no similar researches in this field, especially with
focus on the Serbian financial market and that is the
reason why these results are so original and important.
Having all the above mentioned in mind, it is necessary
to perform a detail analysis of the investment processes
with special attention to the volatility peculiarities of the
financial market in transitional economies, that is, on the
Serbian financial market. Usage of the fuzzy sets as a part
of soft computing (SC) technology in the investment
processes represents the basis for gaining and maintaining
of the competitive advantage on the financial markets.
Hence, the possibility of the fuzzy sets application in the
forecasting of the stock market prices in an uncertain
environment is in the focus of the research, since it is
clearly a precondition of investment processes
optimization, while focusing on the investment risk and
return characteristics.
Further research in the subject matter comprises
defining and testing of the fuzzy based framework in
function of the stock market forecasting in the investment
processes with special attention to an uncertain
environment.
ACKNOWLEDGMENT
The authors acknowledge the financial support of the
Ministry of Education, Science and Technological
Development of the Republic of Serbia, within the
Projects No. TR 34014 and No. ON 174009.
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