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IEEE TRANSACTIONS ON NEURAL NETWORKS AND LEARNING SYSTEMS
Radial Basis Functions With Adaptive Input
and Composite Trend Representation
for Portfolio Selection
Zhao-Rong Lai, Member, IEEE, Dao-Qing Dai , Member, IEEE,
Chuan-Xian Ren , Member, IEEE, and Ke-Kun Huang, Member, IEEE
Abstract— We propose a set of novel radial basis functions with
adaptive input and composite trend representation (AICTR) for
portfolio selection (PS). Trend representation of asset price is one
of the main information to be exploited in PS. However, most
state-of-the-art trend representation-based systems exploit only
one kind of trend information and lack effective mechanisms to
construct a composite trend representation. The proposed system
exploits a set of RBFs with multiple trend representations, which
improves the effectiveness and robustness in price prediction.
Moreover, the input of the RBFs automatically switches to
the best trend representation according to the recent investing
performance of different price predictions. We also propose a
novel objective to combine these RBFs and select the portfolio.
Extensive experiments on six benchmark data sets (including a
new challenging data set that we propose) from different real-
world stock markets indicate that the proposed RBFs effectively
combine different trend representations and AICTR achieves
state-of-the-art investing performance and risk control. Besides,
AICTR withstands the reasonable transaction costs and runs fast;
hence, it is applicable to real-world financial environments.
Index Terms— Adaptive input, composite trend representation,
portfolio selection (PS), radial basis functions (RBF).
I. I NTRODUCTION
P ORTFOLIO selection (PS) can be seen as a special
optimization problem in machine learning. On one hand,
it exploits many machine learning methods, such as Newton
gradient step [1], nearest neighbor [2], and nonparametric
learning [3]. On the other hand, it should also consider
economic and financial theories and criterions, especially
Manuscript received July 27, 2017; revised January 4, 2018 and
April 9, 2018; accepted April 13, 2018. This work was supported in
part by the National Science Foundation of China under Grant 61703182,
Grant 11631015, Grant U1611265, Grant 61572536, and Grant 61403164,
in part by the Fundamental Research Funds for the Central Universities under
Grant 21617347 and Grant 16lgzd16, and in part by the Talent Introduc-
tion Foundation of Jinan University under Grant 88016653. (Corresponding
author: Dao-Qing Dai.)
Z.-R. Lai is with the Department of Mathematics, College of Information
Science and Technology, Jinan University, Guangzhou 510632, China (e-mail:
laizhr@jnu.edu.cn).
D.-Q. Dai and C.-X. Ren are with the Intelligent Data Center, School
of Mathematics, Sun Yat-sen University, Guangzhou 510275, China (e-mail:
stsddq@mail.sysu.edu.cn; rchuanx@mail.sysu.edu.cn).
K.-K. Huang is with the Department of Mathematics, Jiaying University,
Meizhou 514015, China (e-mail: kkcocoon@163.com).
This paper has supplementary downloadable material available at
http://ieeexplore.ieee.org, provided by the author.
Color versions of one or more of the figures in this paper are available
online at http://ieeexplore.ieee.org.
Digital Object Identifier 10.1109/TNNLS.2018.2827952
2162-237X © 2018 IEEE. Personal use is permitted, but republication/redistribution requires IEEE permission.
See http://www.ieee.org/publications_standards/publications/rights/index.html for more information.
1
investing behaviors [4], [5]. Therefore, most state-of-the-art
PS systems make future price predictions based on historical
price information before setting a portfolio.
Trend representation is one of the main methods to make
future price predictions based on some heuristic financial phe-
nomena. Currently, there are three main approaches for trend
representation: trend-following, trend-reversing, and trend-
pattern-matching [6]. Trend-following systems assume that
the price of a good performing asset will continue to rise
due to the irrational investing behaviors [4], [5], [7]. Such
systems include Newton step [1], exponential gradient [8], and
peak price tracking (PPT) [9]. On the contrary, trend-reversing
systems assume that the asset price will reverse to some kind
of its historical average. The moving average [10]–[12] is a
typical index for historical average reference. As for the trend-
pattern-matching systems, they try to find historical patterns
that are similar to the current pattern and use the historical
results to predict the increasing potential of the assets [2], [3].
Although many effective trend representation methods have
been proposed, few systems can effectively combine these
representations and construct a composite representation.
For example, the simple moving average (SMA) [6], [10],
the exponential moving average (EMA) [6], [10], and the
PP [9] are popular trend representations that appear in most
stock data interface softwares (see Fig. 1). SMA and EMA
are trend reversing (their plots can be above or below the
actual price), whereas PP is trend following (its plot is always
above the actual price). Besides, EMA is closer to the actual
price than SMA in general. Different features of different
trend representations lead to different investing performances
in different financial markets or economic environments from
time to time. It motivates us to propose a system that can
effectively fuse these trend representations.
Radial basis functions (RBF) have been catching more and
more attention from the neural network community recently
and new usages have been found in function approxima-
tion [13], [14], clustering [15], classification [16], [17], and
solving nonlinear problems [18]. Dynamic surface control
has been adopted in the backstepping design to avoid “the
explosion of complexity” [13], [19]. Class-specific clustering
techniques are proposed to train RBF networks [15], [20].
A nonsymmetric variant of the fuzzy means algorithm is
proposed to increase accuracy and parsimony of the RBF
networks [21]. The structure of RBF networks has also
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2 IEEE TRANSACTIONS ON NEURAL NETWORKS AND LEARNING SYSTEMS

of the experiments, including on the new data set HS300.

Thus, the composite trend representation really takes effect
and improves the performance and robustness in PS.
The rest of this paper is arranged as follows. The exploita-
tion of price information and three main trend representa-
tions are introduced in Section II. The AICTR system is
presented and explained in Section III. Extensive experiments
of AICTR on real-world benchmark data sets from different
stock markets are conducted and shown in Section IV. Finally,
conclusions are drawn in Section V.

II. T HREE M AIN T REND R EPRESENTATIONS

A. Exploitation of Price Information
In this paper, we use a standard and common setting of
PS in machine learning [9], [10], [12], [23]–[26] to exploit
Fig. 1. Several trends of an asset price sequence. “Price” denotes the actual
asset price, whereas “SMA,”“EMA,” and “PP” denote the SMA, the EMA,
price information. Suppose there are d assets in a financial
and the PP of the actual asset price, respectively. These trends are introduced market and their close prices at the end of the tth period
in Section II-B. (the current investing period) are denoted as a vector pt ∈ Rd+ ,
t = 0, 1, 2, · · · , where Rd+ denotes the d-dimensional nonneg-
been developing. For example, a combination scheme of ative number space. To see the outcome of one unit capital
self-organized and supervised learning is proposed in [22], invested in the i th asset during the tth trading period, another
which learns faster than backpropagation. A kind of geometric concept called price relative [25] is introduced
RBF that uses the geometric algebra framework is designed pt
to conduct geometric computing [16]. xt  , xt ∈ Rd+ , t = 1, 2, 3, . . . (1)
pt −1
In this paper, we propose a novel RBF system with adaptive
where a division between two vectors means element-wise
input and composite trend representation (AICTR), which
division in this paper. In fact, price relative is the main form
has a new structure of adaptive input. Suppose we have
of information that a PS system exploits.
L different trend representations (or price predictions). First,
To denote the proportion of the total wealth invested in
AICTR backtests their investing performance in a recent time
each asset at the beginning of the tth period, we introduce
window and finds the best performing one: it should have
a portfolio vector lying on the d-dimensional simplex
the highest influence in the future price prediction. Second,  
AICTR sets the influence of other trend representations d
(i)
according to their similarities to the best performing trend. bt ∈ d := b ∈ R+ : d
b =1 . (2)
This strategy not only allows all the trend representations to i=1
take effect on the future price prediction but also sets the Thus, the amount to be invested in the i th asset is St −1 b(i)t ,
influence according to their investing performance. Our main where St −1 is the cumulative wealth (CW) at the end of the
contributions can be summarized as follows. (t − 1)th period. The nonnegative constraint indicates that the
1) Propose a set of RBFs with multiple trend representa- short selling is not allowed, whereas the equality constraint
tions as their centers, which forms a composite trend indicates that no extra money can be borrowed and all the
representation. wealth from last period should be reinvested in the current
2) Propose a scheme to automatically select the trend period.
representation with the best investing performance as an It can be seen that St = St −1 · (b 
t xt ), namely, bt xt is the
adaptive input for the RBFs. increasing factor of the tth period. Without loss of generality,
3) Propose an optimization model to update the portfolio, suppose the whole investment consists of n periods with the
and design a fast solving algorithm. initial wealth S0 = 1, then the evolution path of Sn is
4) Propose a new data set “HS300” based on the financial

n
  
market in China, which is challenging for the existing Sn = bt xt . (3)
PS systems since the market environment is different. t =1
It supplements the data library of this research area since
A PS system sequentially selects a set of portfolio vectors
the data sets before are mainly from North America.
{bt }nt=1 to maximize the final CW Sn
This paper is a nontrivial extension of the PPT strategy [9].
First, AICTR adopts multiple trends and has a trend selection 
n
  
scheme, but PPT adopts only one trend. Second, the derivation Ŝn = maxn bt xt . (4)
{bt ∈d }t=1
t =1
of the solving algorithm of AICTR includes the transform
of trace operator, the idempotent of some matrices, and It is equivalent to maximizing the increasing factor b
t +1 xt +1
the uniqueness of solution, which are not involved in PPT. based on the price information up to the tth period as time
Third, AICTR outperforms PPT to a large extent on most goes on.
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LAI et al.: RBF WITH AICTR FOR PS 3

B. Three Main Trend Representations different assets in a recent time window

(i) (i)
In real-world stock and future analyses, there are three main p̂t +1 = max pt −k , i = 1, 2, . . . , d
0k w−1
trend representations that almost appear in every stock data
interface software: the SMA [6], [10], the EMA [6], [10], and p̂t +1
x̂ M,t +1 = . (7)
the PP [9] (see Fig. 1). pt
1) SMA: SMA exploits the average of the asset prices in x̂ M,t +1 can be seen as a kind of increasing power of the assets.
the most recent time window with size w to predict the future The three main trend representations have different advan-
price relative tages in different financial environments. SMA and EMA are
w−1 trend-reversing and defensive, whereas PP is trend-following
k=0 pt −k and aggressive. SMA and PP focus on the most recent price
x̂ S,t +1(w) = . (5)
wpt information in a time window, whereas EMA exploits all the
historical prices but the influence deteriorates exponentially
It assigns the same weight to asset prices on different periods. with respect to the time from the current moment. They
It can smooth the extreme prices in the time window to obtain inspire us to develop a composite trend representation that is
the most recent price information from a financial market. more effective and adaptive to different financial environments,
2) EMA: Different from SMA, EMA does not set the which is illustrated in Section III.
time window limit. Besides, it assigns different weights to
asset prices on different periods when computing the average. III. RBF S W ITH A DAPTIVE I NPUT AND
Explicitly, it is a combination of the current price and the C OMPOSITE T REND R EPRESENTATION
previous EMA
In Section II-B, some trend representations are introduced.
EMAt (ϑ) ϑpt + (1 − ϑ)EMAt −1 (ϑ) They show different investing performances from time to
x̂ E,t +1 (ϑ) = = time according to the financial environment at the moment.
pt pt
EMAt −1 (ϑ) pt −1 Therefore, it is natural to combine and fuse these trend
= ϑ1 + (1 − ϑ) representations and give the best performing one with the
pt −1 pt
highest influence in the future price prediction. In this section,
x̂ E,t
= ϑ1 + (1 − ϑ) (6) we propose an AICTR system to realize this idea.
xt

where 1 is a d-dimensional vector with elements of 1, A. Proposed RBFs

0 < ϑ < 1 is the smoothing parameter, and xt is the actual A typical form of an RBF system is the following:
price relative of the tth period.
If we expand the representation of EMAt to more terms, y = Aφ(x), φ = [φ1 , φ2 , . . . , φ L ]

then −x − μl 2
φl (x) = exp (8)
2σl2
EMAt = ϑpt + (1 − ϑ)EMAt −1
= ϑpt + (1 − ϑ)ϑpt −1 + (1 − ϑ)2 EMAt −2 = · · · where x and y are the input and output, respectively, A ∈ Rd×L
t −1 is a weight matrix mixing the RBFs, d is the dimension of

= (1 − ϑ)k ϑpt −k + (1 − ϑ)t p0 . output, φ is a vector of Gaussian basis functions, and μl and
k=0 σl are the center and the scale parameter, respectively.
With the formulation of this paper, we denote L trend
Thus, EMA actually makes use of every asset price, but the representations as {x̂l,t +1 }l=1
L . Examples are x̂
S,t +1, x̂ E,t +1 ,
more recent prices have larger weights since they have more and x̂ M,t +1 in (5)–(7), respectively (see also Fig. 1). We further
influence in price prediction. Therefore, the EMA trend is transform {x̂l,t +1}l=1
L to eligible portfolios by projecting them

closer to the actual price trend than SMA in general. onto the d-dimensional simplex [32]
3) PP: SMA and EMA are trend representations that cor-
x̃l,t +1 = argmin x − x̂l,t +1 2 , l = 1, . . . , L (9)
respond to the mean reversion principle [6], [27]–[29]. They x∈d
represent a moderate attitude in price prediction. However,
evidence has been emerging that the irrational investing behav- where d is defined in (2). Note that x̂l,t +1 and x̃l,t +1 are
iors help to keep on price trends [4], [5], [7], [30], [31]. different vectors. x̂l,t +1 is the predicted future price relative,
Hence, we also need trend representations that are based whereas x̃l,t +1 is an eligible portfolio. By this way, we can
on the trend-following strategy. In most financial markets, use {x̃l,t −k }w−1
k=0 in a recent time window to backtest the recent
ordinary investors mainly gain profits when the asset prices investing performance of the lth trend
increase since they lack short-selling permissions. Thus, they 
Rl,t −k = x̃l,t −k xt −k , k = 0, . . . , w − 1 (10)
are concerned about the possible maximum prices that the
assets have ever been bid for recently, which can be references where Rl,t −k is the increasing factor of the lth trend portfolio
for the possible highest prices in the near future. The peak on the (t − k)th period and xt −k is the actual price relative
price tracking system [9] proposes to exploit the PPs of calculated by (1).
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4 IEEE TRANSACTIONS ON NEURAL NETWORKS AND LEARNING SYSTEMS
Fig. 2. Choice of the adaptive input. We first observe the backtested
increasing factors of different trends in the time window and find the smallest
increasing factor of each trend. Next, we choose the maximum of the smallest
increasing factors and use the corresponding trend as the adaptive input.
By this way, we obtain the best performing trend representation in the worst
financial environment.
Then, we can compare the recent investing performance of
different trend representations and use the following scheme to
automatically select the best performing trend as the adaptive
input for the RBFs:
x̃∗,t +1 , ∗  argmax min Rl,t −k .
1l L 0k w−1
The choice of the adaptive input is illustrated in Fig. 2. We first
find the smallest increasing factor in the time window for each
trend portfolio and choose the one with the largest increasing
factor among different trend portfolios. By this way, we obtain
the best performing trend representation in the worst financial
environment, which improves the robustness of the whole
system.
All the trend portfolios {x̃l,t +1 } are taken as the centers of
the RBFs, whereas the best performing one x̃∗,t +1 is taken as
the common input. The proposed RBFs are
bt +1 = X̂t +1 φ(x̃∗,t +1), φ = [φ1 , φ2 , . . . , φ L ]
Based on the gradient projection principle [9], [10], [12],
−x̃∗,t +1 − x̃l,t +1 2
φl (x̃∗,t +1) = exp (12)
2σl2
where bt +1 is the update increment of the portfolio on
the (t + 1)th period (the next investing period) and X̂t +1 =
[x̂1,t +1, . . . , x̂ L ,t +1] ∈ Rd×L acts as the weight matrix.
The reason why bt +1 has such a form is illustrated in
Section III-C. The RBFs quantify the similarities between
x̃∗,t +1 and x̃l,t +1 . If x̃l,t +1 is closer to x̃∗,t +1, then the
corresponding φl will be larger and x̃l,t +1 gains more influence
in the update increment bt +1 (see Fig. 3). As time t
goes on, the adaptive input x̃∗,t +1 switches among different
trend portfolios and keeps to the newest financial environment.
Our RBF system is quite different from (8) since the
problem settings and data features of PS are different.
1) The centers {μl } in (8) are trained by minimiz-
ing the error of fitting y [15], whereas {x̃l,t +1 }
in (12) are updated by the corresponding newest trend
representations.
2) The input x in those RBFs is a fixed training sample,
whereas x̃∗,t +1 in (12) is decided by the recent investing
performance of {x̃l,t +1 }. In other words, all trend repre-
sentations {x̃l,t +1 } are possible to become an input from
time to time.
3) The objective of (8) is to fit y and it can be solved
by backpropagation methods [15], [33], [34], whereas
the objective of (12) is to maximize a generalized
increasing factor and its solving algorithm needs to be
designed.
B. Proposed Portfolio Selection Model
The next step is to combine the RBFs to form a PS model,
in order to achieve good investing performance. As addressed
in Section II-A, we need to maximize the increasing factor
bt +1 xt +1 based on the price information up to the tth period.
Although xt +1 is not known on the current period, the trend
representations {x̂l,t +1} can be used instead. Moreover, the pro-
posed RBFs can also be combined to form a generalized
increasing factor as follows:
 
bt +1 = argmax tr BX̂t+1 , B = b1 (L)
b
 = diag(φ), X̂t +1 = [x̂1,t +1, . . . , x̂ L ,t +1 ]
s.t. b ∈ d , b − b̂t   ,  > 0 (13)
(11) where tr is the trace operator, B contains L replicates of b,  is
a diagonal matrix formed by φ, and X̂t +1 is the collection of
the L different trend representations. 1(L) is an L-dimensional
vector with elements of 1 (which is discriminated from the
d-dimensional 1). The constraints of b force it to be a portfolio
and in a distance  from b̂t (the current portfolio).
Compared with the original increasing factor b x̂t +1 of
PPT [9], tr(BX̂t+1 ) is a generalized increasing factor
with  as a kernel that adjusts the influence of different
trend representations. The best performing trend representation
x̂∗,t +1 has the largest influence, whereas other {x̂l,t +1 } have
less influence, which depends on their similarities to x̂∗,t +1
[see (12) and Fig. 3].
[32], [35], the simplex constraint of b can be relaxed to
1 b = 1 to solve for bt +1 at first, then it is projected to
the simplex. Besides, let c = b − b̂t , then (13) can be further
simplified to
 
ct +1 = argmax tr CX̂t+1 , s.t. 1 c = 0, c  
c

C= c1(L). bt +1 = b̂t + ct +1 . (14)
The reason is that b̂t is fixed and 1 c = 1 b − 1 b̂t = 0.
Now, the optimization target has changed to the update
increment ct +1 .
C. Solving Algorithm
In this section, the solving algorithm for AICTR is estab-
lished. It can be summarized as the following proposition.
Proposition 1: If (I−(1/d)11 )X̂t +1 1(L) = 0, the unique
solution of (14) is
 
 I − d1 11 X̂t +1 1(L)
ct +1 =   . (15)
 I − 1 11 X̂t +1 1(L)
d
The proof of this proposition is given in the Appendix.
It is a nontrivial extension of PPT [9] since it includes the
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LAI et al.: RBF WITH AICTR FOR PS 5

Fig. 3. Simple example of the proposed RBF system (σl2 = 0.5). The influence of each trend in the update increment is determined by its similarity to the
best performing trend.

transform of trace operator, the idempotent of some matrices

and the uniqueness of solution, which are not involved in [9].
If (I − (1/d)11 )X̂t +1 1(L) = 0, we just set ct +1 = 0.
According to Proposition 1, the update increment

1
ct +1 = P I − 11 X̂t +1 1(L)
d

1
= P I − 11 X̂t +1 φ (16)
d Fig. 4. Diagram of AICTR. First, we exploit the recent asset prices to
extract a set of trend representations [x̂1,t+1 , . . . , x̂ L ,t+1 ], and normalize
where P is the projection onto the -Euclidean ball. Com- them to portfolios [x̃1,t+1 , . . . , x̃ L ,t+1 ], which makes it convenient to test
pared with (12), ct +1 further imposes two operators on bt +1 , their investing performance. Then, we choose the best trend x̃∗,t+1 and insert
in order to satisfy the constraints in (14). Therefore, the update it to the constructed RBFs {φl }, and obtain the influence kernel . Next,
we multiply  by [x̂1,t+1 , . . . , x̂ L ,t+1 ] to get the update increment bt+1 ,
increment of the portfolio essentially has the form of (12).
then we update and normalize the portfolio to obtain an eligible one b̂t+1 .
Finally, the next portfolio b̂t +1 can be calculated as follows:
bt +1 = b̂t + ct +1 TABLE I
I NFORMATION OF S IX B ENCHMARK D ATA S ETS
b̂t +1 = argmin b − bt +1 2 . (17)
b∈d

The whole AICTR system can be summarized as Algorithm 1

and illustrated by Fig. 4. AICTR consists of direct matrix
calculations and does not require any iterations; thus, it is
a fast algorithm. The computational costs of AICTR will be
discussed in Section IV-D2.
IV. E XPERIMENTAL R ESULTS
Algorithm 1 Whole AICTR System In this section, extensive experiments with multiple indica-
Input: Given parameters w, , {σl2 }l=1 L , the trend representa-
tors are conducted on six benchmark data sets, five of which
tions and the actual price relatives in the recent time window have been proposed earlier: NYSE(O) [25], NYSE(N) [36],
{x̂l,t −k , xt −k }w−1
k=0 , and the current portfolio b̂t . Dow Jones Industrial Average (DJIA) [37], Standard & Pool
1. Compute the corresponding trend portfolios {x̃l,t −k }w−1 k=0 500 (SP500) [37], and Toronto Stock Exchange (TSE) [37].
by (9). These data sets consist of real-world daily close stock price rel-
2. Compute the recent increasing factors {Rl,t −k }w−1 k=0 of ative sequences from the New York Stock Exchange (NYSE),
different trend representations by (10) to evaluate their recent DJIA, SP500, and TSE, respectively. Interested readers can
investing performance. check [6] (http://olps.stevenhoi.org/) or the original papers
3. Choose the common adaptive input x̃∗,t +1 by (11). for these data sets. Besides, we also propose a new data
4. Compute the RBFs {φl }l=1 L by (12). set called “HS300” in this paper, which contains the price
1 
if (I − d 11 )X̂t +1 1(L) = 0 then relative sequences of some Hushen 300 (also named “CSI300,”
5. Let ct +1 = 0. http://www.csindex.com.cn/) constituents from China in a
else recent time span. It supplements the data library of this
(I− d1 11 )X̂t+1 1(L) research area since the data sets before are mainly from North
6. Compute ct +1 = 1 
.
(I− d 11 )X̂t+1 1(L)  America. HS300 is challenging for the existing PS systems
end if
since its market environment is different from North America.
7. Update and normalize to obtain the next portfolio b̂t +1
All the above-mentioned data sets include diverse economic
by (17).
and financial environments from different markets. Their infor-
Output: The next portfolio b̂t +1 .
mation is shown in Table I.
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6 IEEE TRANSACTIONS ON NEURAL NETWORKS AND LEARNING SYSTEMS

Fig. 5. Final CWs of AICTR with respect to σl2 on six benchmark data sets (fix w = 5 and  = 1000). (a) NYSE(O). (b) NYSE(N). (c) DJIA. (d) SP500.
(e) TSE. (f) HS300.

We take five state-of-the-art PS systems and two trivial selecting process starts from the first day of each data set with
systems to make comparisons with AICTR. The two trivial the initial portfolio b1 = (1/d)1.
systems (i.e., uniformly buy-and-hold and Beststock (BS) [6]) We use seven indicators to thoroughly evaluate the perfor-
have long been taken as the performance baselines in invest- mance of different PS systems. They belong to three categories
ment. The former invests equally in d assets at the beginning as follows.
and holds unchanged, which is often taken as the market 1) Investing Performance:
strategy that produces the market index [10]. The latter works a) CW: The main indicator to evaluate investing
in quite an opposite way that it invests all the wealth in the performance.
best asset in the whole investment. Note that BS is a hindsight b) Mean Excess Return (MER) [27]: The average
strategy that cannot be implemented in reality. The five state- return gap between a system and the Market
of-the-art systems are as follows. strategy.
c) α Factor [41]: Intrinsic MER that excludes the
1) CORN [3]: It matches the historical trend patterns to the
market effect.
current pattern based on the cross-window correlations
2) Risk Metrics:
of asset prices.
a) Sharpe Ratio (SR) [42]: Risk-adjusted mean
2) Anticor [37]: It transfers wealth from the previous
return.
good performing stocks to the current anticorrelated bad
b) Information Ratio (IR) [43]: Risk-adjusted MER.
performing stocks.
3) Application Issues:
3) OLMAR [10]: It takes the moving average to predict the
a) Transaction costs.
future price.
b) Computational costs.
4) RMR [11], [12]: It uses a technique of 1 -median AICTR achieves state-of-the-art results in all these
[38]–[40] to improve robustness in price prediction. indicators.
5) PPT [9]: It proposes to exploit the PPs of different assets
in a recent time window. A. Parameter Setting and Combinations of Trends
The parameters for these systems are set by the their defaults We give some analyses about the parameter setting
and according to previous experiments [6], [9], [10], [12]: of AICTR. Experiments of final CW are conducted on the
Correlation-driven nonparametric learning [3] w = 5, P = 1, benchmark data sets. Final CW Sn represents how much
and ρ = 0.1; Anticor: w = 5; On-Line Moving Average wealth we can get at the end of the investment with the initial
Reversion (OLMAR): ϑ = 0.5 and  = 10; Robust Median wealth S0 = 1, as shown in (3).
Reversion (RMR): w = 5 and  = 5; and PPT: w = 5 We follow similar methods to the related works to empir-
and  = 100. The parameters of AICTR are set as w = 5, ically set the parameters [3], [9]–[12], [37]. First, we set
σl2 = 0.0025, and  = 1000, and three trends (x̂ S,t +1, x̂ E,t +1 , w = 5 to be consistent with previous researches [3], [9],
and x̂ M,t +1 in (5)–(7)) are adopted. Note that the window [10], [12]. Besides, w = 5 is a common time window size
size w = 5 is the same with all these systems. The portfolio in stock and future investments and the price information in
 This article has been accepted for inclusion in a future issue of this journal. Content is final as presented, with the exception of pagination.

LAI et al.: RBF WITH AICTR FOR PS 7

Fig. 6. Final CWs of AICTR with respect to  on six benchmark data sets (fix w = 5 and σl2 = 0.0025). (a) NYSE(O). (b) NYSE(N). (c) DJIA. (d) SP500.
(e) TSE. (f) HS300.

TABLE II
F INAL CW S OF AICTR W ITH D IFFERENT C OMBINATIONS OF T RENDS ON S IX B ENCHMARK D ATA S ETS

such a time window reflects the recent financial environment.
As for  and σl2 , we first give rough estimations and then
tune them in small intervals.  is the update strength and,
thus, it is set as a large value. σl2 is the scale parameter of
the difference between two trend portfolios and, thus, it is
set as a small value since such a difference is usually small.
We fix w = 5,  = 1000, and let σl2 change from 0.0023
to 0.0028. Results in Fig. 5 show that AICTR is stable around
σl2 = 0.0025 in general. Then, we fix w = 5 and σl2 = 0.0025
and let  change from 800 to 1300. Results in Fig. 6 show that
AICTR is stable around 1000. Hence, by fixing two parameters
and tuning the other, we empirically set w = 5, σl2 = 0.0025,
and  = 1000 for AICTR.
To test whether the RBFs effectively combine different
trend representations to achieve better investing performance,
we compare different combinations of the trend representations
with the default AICTR. Results are shown in Table II,
where “Equal Weights” indicates that the kernel  =
diag([1/3; 1/3; 1/3]) and “Best Trend” indicates that only the
best trend x̂∗,t +1 is used in the model. Note that when two
trends are adopted, the input selection method [see (9)–(11)]
is applied. The default AICTR outperforms other combinations
in most situations, which indicates that the RBFs really take
effect.
B. Investing Performance
1) Cumulative Wealth: The final CWs of different PS sys-
tems on six data sets are shown in Table III. AICTR out-
performs the other state-of-the-art systems on five data sets
and ranks the second on NYSE(N). For example, AICTR
achieves much higher CWs (4.17, 14.22, and 902.51) than
OLMAR (1.16, 9.59, and 732.44), RMR (2.67, 8.28, and
181.34), and PPT (3.08, 10.78, and 277.58) on DJIA, SP500,
and TSE, respectively. Only AICTR (1.42) and RMR (1.35)
among the nontrivial strategies perform better than the Market
strategy (1.34) on HS300. It indicates that AICTR effectively
combines different trend representations to achieve better
investing performance.
To see how the PS systems work during the entire invest-
ment, we plot the CWs of different systems on DJIA and
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8 IEEE TRANSACTIONS ON NEURAL NETWORKS AND LEARNING SYSTEMS

TABLE III
F INAL CW S AND MER S OF PS S YSTEMS ON S IX B ENCHMARK D ATA S ETS

Fig. 7. CWs of PS systems during the entire investments on two data sets with daily data: DJIA (top, time: January 14, 2001–January 14, 2003) and SP500
(bottom, time: January 2, 1998–January 31, 2003).

SP500 in Fig. 7. The plots of AICTR are above other systems return that a PS system exceeds the Market strategy
on most periods, indicating that it achieves effective long-term
1
n
investing performance.
MER = r̄s − r̄m = (rs,t − rm,t ) (18)
2) Mean Excess Return: Return is the percentage of wealth n
t =1
that an investor has gained or lost on one period. Since we
use daily data to conduct experiments, the daily return of the where rs,t and rm,t denote the returns of a PS system and the
tth period is rt = b̂
t xt − 1. MER is the long-term average Market strategy on the tth period, respectively. The MERs of
 This article has been accepted for inclusion in a future issue of this journal. Content is final as presented, with the exception of pagination.
LAI et al.: RBF WITH AICTR FOR PS
TABLE IV
α FACTORS (W ITH p-VALUES OF t -T ESTS ) OF PS S YSTEMS ON S IX B ENCHMARK D ATA S ETS
TABLE V
SR S AND IR S OF PS S YSTEMS ON S IX B ENCHMARK D ATA S ETS
different systems are shown in Table III. AICTR achieves the
largest MERs among the state-of-the-art systems on five data
sets and ranks the second on NYSE(N). For example, AICTR
(0.0038, 0.0024, and 0.0067) outperforms OLMAR (0.0012,
0.0020, and 0.0065), RMR (0.0029, 0.0019, and 0.0053), and
PPT (0.0032, 0.0022, and 0.0058) on DJIA, SP500, and TSE,
respectively. It indicates that AICTR has a good long-term
investing performance.
3) α Factor: According to the capital asset pricing
model [44], the expected return of a PS system can be
decomposed to the market component and the inherent excess
return. The risk or volatility of the market component cannot
be avoided since any portfolio cannot exist without the corre-
sponding market. However, the inherent excess return which
is usually called the α Factor in the finance industry [41] is
possible to be improved by better PS systems. Hence, it is
reasonable to compare the α Factors of different PS systems
to evaluate their investing performance
ĉ(rs , rm )
E(rs ) = α + β E(rm ), β̂ = , α̂ = r̄s − β̂ r̄m (19)
ŝ 2 (rm )
where E(·) is the mathematical expectation, ĉ(·, ·) and ŝ(·) are
the sample covariance and the sample standard deviation
that can be estimated by the daily returns of n periods
(i.e., n samples), respectively.
The α Factors of different systems are shown in Table IV.
AICTR achieves the highest α Factors among the state-
of-the-art systems on five data sets and ranks the second
on NYSE(N). For example, AICTR achieves α = 0.0039,
0.0022, and 0.0065 on DJIA, SP500, and TSE, compared
with OLMAR (0.0013, 0.0019, and 0.0063), RMR (0.0030,
0.0018, and 0.0051), and PPT (0.0034, 0.0020, and 0.0055),
respectively. Hence, AICTR has high inherent excess returns.
Besides, AICTR is the only state-of-the-art system that
achieves a positive α Factor on HS300. To test whether
α is significantly larger than 0, a statistical t-test is con-
ducted to show that the inherent excess return is not due to
9
luck [9], [10], [12], [45]. The results in Table IV indicate
that the αs of AICTR are significantly larger than 0 at a high
confidence level of 99% (with all p-values < 0.01) on five
data sets. These results show that AICTR achieves significant
inherent excess returns.
C. Risk Metrics
1) Sharpe Ratio: In practical finance, investors who want to
gain a higher excess return will probably have to bear a higher
risk. Hence, investors need systems that cannot only achieve
a high excess return but also balance with risk. SR [42] is a
traditional measurement as a risk-adjusted return
r̄s − r f
SR = (20)
ŝ(rs )
where r f is the return of some risk-free asset. Since no
risk-free assets are considered in this paper, r f is set as 0.
The average return r̄s and the standard deviation ŝ(rs ) of a
PS system are estimated by the daily returns of n periods
(n samples).
The SRs of different PS systems are given in Table V.
AICTR (0.0995, 0.0763, 0.1181, and 0.0555) achieves the
highest SRs among the state-of-the-art systems on DJIA,
SP500, TSE, and HS300, compared with OLMAR (0.0252,
0.0682, 0.1156, and 0.0353), RMR (0.0763, 0.0659, 0.0981,
and 0.0512), and PPT (0.0821, 0.0699, 0.1019, and 0.0246),
respectively. Besides, AICTR is comparable to OLMAR,
RMR, and PPT on other data sets. For example, AICTR is
higher than RMR and PPT on NYSE(O) and higher than
OLMAR and RMR on NYSE(N). These results show that
AICTR can balance well between return and risk.
2) Information Ratio: IR [43] is also a risk metric such as
SR but it directly measures the risk-adjusted excess return of
a system compared with the Market strategy
r̄s − r̄m
IR = . (21)
ŝ(rs − rm )
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10 IEEE TRANSACTIONS ON NEURAL NETWORKS AND LEARNING SYSTEMS

Fig. 8. Final CWs of PS systems with respect to transaction cost rate γ on six benchmark data sets. (a) NYSE(O). (b) NYSE(N). (c) DJIA. (d) SP500. (e)
TSE. (f) HS300.

IRs of different PS systems are given in Table V. AICTR TABLE VI

(0.1364, 0.1133, and 0.0181) achieves the highest IRs among T IME C OMPLEXITY A NALYSIS OF PS S YSTEMS
the state-of-the-art systems on DJIA, TSE, and HS300,
compared with OLMAR (0.0457, 0.1111, and −0.0061),
RMR (0.1092, 0.0932, and 0.0099), and PPT (0.1176, 0.0970,
and −0.0255), respectively. Besides, AICTR is competitive to
the best system on other data sets. Hence, AICTR achieves
good excess returns and it is good at risk control as well.

D. Application Issues
1) Transaction Costs: Transaction cost is an important issue moderate (0 ∼ 0.2%), AICTR achieves the best performance
in real-world PS applications. In general, the proportional on five data sets. Even when γ is high (near to 0.5%), AICTR
transaction cost model [10], [12], [46] indicates that the CW still outperforms other state-of-the-art systems on five data sets
at the beginning of the tth period is and it is comparable to PPT on the other two data sets. Hence,

 AICTR is an effective system in handling transaction costs,
γ
n
   γ   (i)
d
(i) 
Sn = S0 b̂t xt × 1 − b̂t − b̃t −1 indicating that it is fit for real-world financial environments.
2 2) Computational Costs: Computational cost is another
t =1 i=1
(i) (i) important issue when a PS system is adopted in real-world
(i) b̂t −1 ∗ xt −1 financial environments, especially in large-scale and time-
b̃t −1 =
b̂
t −1 xt −1
limited applications, such as high-frequency trading [47]. The
main factors that affect the computational cost of AICTR is
where b̃(i)
t −1 is the adjusted portfolio of the i th asset at the the total investing periods n, the number of assets d, and
end ofthe (t − 1)th period and b̃0 is set as [0, . . . , 0] . the number of trends L. Algorithm 1 shows that the time
(γ /2) di=1 |b̂(i) (i)
t − b̃t −1 | is the proportional transaction cost complexity of AICTR is O[(d + L)dn]. If L  d, then
caused by changing the adjusted portfolio b̃t −1 to the next the complexity can be further reduced to O(d 2 n). Note that
portfolio b̂t . the trends used in this paper take no more than O(d) time
We let γ change in 0 ∼ 0.5% and conduct experiments to compute. Step 6 of AICTR takes O(d 2 + d L) time,
of the final CWs for different PS systems, in order to test which is the most time-consuming step. Besides, none of the
their performance with consideration of transaction costs. The steps are repeated iterations that may take much more time.
results are shown in Fig. 8. When the transaction cost rate γ is The time complexity analysis for different systems is shown
 This article has been accepted for inclusion in a future issue of this journal. Content is final as presented, with the exception of pagination.

LAI et al.: RBF WITH AICTR FOR PS 11

in Table VI, where M is the maximum loop of iterations To deduce a contradiction, we see that I − (1/d)11 ) is
for RMR [12]. idempotent
We also test the average running time of AICTR on one trad-  2 
1 2 1
ing period for each data set by a computer with an Intel Core I − 11 = I − 11 + 1(1 
1)1 
i7 6700 CPU and a 4-GB DDR4 2133-MHz memory card. d d d2
 
The average running times (in seconds) are 0.0002, 0.0001, 2 1  1
= I − 11 + 11 = I − 11 .
0.0008, 0.0001, 0.0002, and 0.0001 on NYSE(O), NYSE(N), d d d
DJIA, SP500, TSE, and HS300, respectively. It indicates that (23)
AICTR is efficient in computing and applicable to large-scale
and time-limited applications. Besides, c̊ has the following property:

1 1
V. C ONCLUSION I − 11 c̊ = c̊ − 1(1 c̊) = c̊ (24)
d d
In this paper, we propose a novel RBF system with AICTR
for PS. Most state-of-the-art trend representation-based sys- since c̊ satisfies the constraint 1 c̊ = 0.
tems exploit only one kind of trend information and do With properties (23) and (24), we can deduce a contradiction
not use effective mechanisms to construct a composite trend from two sides of (22). We analyze the right-hand side first
representation. In fact, different trend representations show    
tr Ct +1 X̂t+1 = tr ct +1 1 
(L) X̂t +1
different advantages in different financial markets or envi-  
ronments; hence, they can be combined to improve investing = tr 1   
(L) X̂t +1 ct +1 = 1(L) X̂t +1 ct +1 .
performance. Based on this motivation, we use a set of RBFs (25)
with multiple trend representations as their centers to construct
a composite trend representation and design a scheme to The second equality is deduced by the commutative property
automatically choose an adaptive input with the best investing of trace, then (1 
(L) X̂t +1 ct +1 ) is a scalar which equals to its
performance for the RBFs. The influence of each trend in trace.
the portfolio update depends on its similarity to the best Then
 
performing trend. We also design a fast solving algorithm to  
1  1 
(L) X̂t +1 I − d 11 X̂t +1 1(L)
solve the objective so that AICTR is applicable to the large- 1(L)X̂t +1 ct +1 =   
 I − 1 11 X̂t +1 1(L)
scale and time-limited situations. d
 
Extensive experiments are conducted on six data sets 1 
(L) X̂t +1 I − d 11
1  2 X̂
t +1 1(L)
=   
(including a new challenging data set HS300 that we propose)  I − 1 11 X̂t +1 1(L)
to show that AICTR effectively combines different trend rep-  d 
 1  
resentations and it is efficient in PS. It outperforms other state- =   I − 11 X̂ t +1 1 
(L) . (26)
of-the-art systems in most situations with indicators of CW, d
MER, and α Factor; hence, it has good investing performance. The second equality exploits the idempotent property (see 23).
Besides, AICTR achieves high SRs and IRs compared with Next, we turn to analyze the left-hand side of (22). Using
the other state-of-the-art systems; hence, it has a good ability similar deductions to (25), we have
to control risk. Moreover, AICTR withstands considerable 
 
     1 
transaction costs and runs very fast, which are important in tr C̊X̂t +1 = 1(L) X̂t +1 c̊ = 1(L)X̂t +1 I − 11 c̊
d
real-world applications. In summary, AICTR is an effective   
  1   
and efficient PS system and worth further investigations.  
1(L)X̂t +1 I − d 11  c̊. (27)
A PPENDIX
The second equality exploits the property (24), and the last
Proof of Proposition 1: First, we verify that ct +1 satisfies inequality is the Cauchy–Schwarz inequality.
the constraints. It is obvious that ct +1  = . Besides Combining (22)–(27), we have
    
1 I − d1 11 X̂t +1 1(L)   1  
1 ct +1 =    1 X̂
t +1 I − 11
 c̊
 I − 1 11 X̂t +1 1(L)  (L) d 
  d 1    
 1 − (1 1)1 X̂t +1 1(L)  1  
=  d1   >   I − 11 X̂t +1 1(L)

, c̊ >  (28)
 I − 11 X̂t +1 1(L)  d
d
(1 − 1 )X̂t +1 1(L) which violates the constraint c̊  .
=    = 0. Now, it has been verified that ct +1 achieves the maximum
 I − 1 11 X̂t +1 1(L)
d in (14). Furthermore, it is the unique solution to (14). If not,
Hence, ct +1 satisfies all the constraints, then it remains to be suppose there exists c∗ = ct +1 satisfying all the constraints,
verified that ct +1 achieves the maximum. If not, suppose there such that tr(C∗ X̂t+1 ) = tr(Ct +1 X̂t+1 ) with C∗ = c∗ 1
(L) .
exists another c̊ that satisfies all the constraints and By similar deductions to (25), we have
       
tr C̊X̂t+1 > tr Ct +1 X̂t+1 (22) 1   
(L) X̂t +1 ct +1 = tr Ct +1 X̂t +1 = tr C∗ X̂t +1

where C̊ = c̊1 
(L) and Ct +1 = ct +1 1(L) .
= 1 
(L) X̂t +1 c∗ (29)
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12 IEEE TRANSACTIONS ON NEURAL NETWORKS AND LEARNING SYSTEMS

which indicates that c∗ is not parallel to ct +1 . If not, assume [15] J. Raitoharju, S. Kiranyaz, and M. Gabbouj, “Training radial basis
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ACKNOWLEDGMENT
The authors would like to thank the Editor-in-Chief,
the Associate Editor, and the anonymous reviewers for the
detailed and constructive comments and suggestions that help
to improve this paper significantly.
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Apr. 2013.
Zhao-Rong Lai (M’14) received the B.Sc. degree
in applied mathematics, the M.Sc. degree in infor-
mation and computational science, and the Ph.D.
degree in statistics from the School of Mathematics,
Sun Yat-sen University, Guangzhou, China, in 2010,
2012, and 2015, respectively.
From 2015 to 2016, he was a Research Scientist
on portfolio management with the Industrial and
Commercial Bank of China (the largest bank in
China) Guangzhou. He is currently an Associate Pro-
fessor with the Department of Mathematics, College
of Information Science and Technology, Jinan University, Guangzhou. His
current research interests include mathematical programming, mathematical
finance, and machine learning.
Dr. Lai was a Program Committee Member of the International Joint
Conference on Artificial Intelligence and European Conference on Artificial
Intelligence, in 2018.
13
Dao-Qing Dai (M’07) received the B.Sc. degree
from Hunan Normal University, Changsha, China,
in 1983, the M.Sc. degree from Sun Yat-sen Uni-
versity, Guangzhou, China, in 1986, and the Ph.D.
degree from Wuhan University, Wuhan, China,
in 1990, all in mathematics.
From 1998 to 1999, he was an Alexander von
Humboldt Research Fellow with Free University of
Berlin, Berlin, Germany. He is currently a Profes-
sor with the School of Mathematics, Sun Yat-sen
University. He has authored and co-authored over
100 refereed technical papers. His current research interests include image
processing, wavelet analysis, face recognition, and bioinformatics.
Dr. Dai was the recipient of the Outstanding Research Achievements in
Mathematics Award from the International Society for Analysis, Applications
and Computation, Fukuoka, Japan, in 1999.
Chuan-Xian Ren (M’14) received the Ph.D. degree
from the School of Mathematics, Sun Yat-sen Uni-
versity, Guangzhou, China, in 2010.
From 2010 to 2011, he was a Senior Research
Associate with the Department of Electronic Engi-
neering, City University of Hong Kong, Hong Kong.
He is currently an Associate Professor with the
School of Mathematics, Sun Yat-sen University. His
current research interests include image processing,
face recognition, and machine learning.
Dr. Ren was an Elected Candidate for the
Thousand-Hundred-Ten Talents Program of Guangdong Province in 2014.
He is an Invited Reviewer of Mathematical Reviews (American Mathematical
Reviews).
Ke-Kun Huang (M’14) received the B.Sc., M.Sc.,
and Ph.D. degrees in applied mathematics from
Sun Yat-sen University, Guangzhou, China, in 2002,
2005, and 2016, respectively.
He is currently an Associate Professor with
the Department of Mathematics, Jiaying Univer-
sity, Meizhou, China. His current research interests
include image processing and face recognition.