Resources Policy 86 (2023) 104248

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

Forecasting rare earth stock prices with machine learning

Irene Henriques, Perry Sadorsky *
Schulich School of Business, York University, 4700 Keele Street, Toronto, Ontario, M3J 1P3, Canada

A R T I C L E I N F O A B S T R A C T

Keywords: Rare earth elements (REEs) are indispensable for producing green technologies and electronics. Demand for REEs
Machine learning in clean energy technologies in 2040 are projected to be three to seven times higher than today and will be
Random forests critical to the clean technology transition needed to stave off catastrophic climate change. Forecasting rare earth
Forecasting
stock prices is critical for making well informed investment decisions concerning this important asset class.
Rare earth elements
Despite the latter, the literature on forecasting rare earth stock prices is scarce. We use machine learning
techniques to forecast daily rare earth stock price direction. The analysis reveals that random forests, extremely
randomized trees, RNN, and support vector machine have higher prediction accuracy than Lasso or Naïve Bayes.
We find that the 10- to 20-day forecasts using random forests, extremely randomized trees, and support vector
machine achieve prediction accuracies greater than 85% with some prediction accuracy reaching 90%. Lasso
prediction accuracy is higher than Naïve Bayes but never greater than 67%. The MA200, MA50, on balance
volume, VIX, and WAD are the most important predictive features of rare earth stock price direction. A switching
portfolio that uses trading signals from an Extra Trees model impressively outperforms a buy and hold portfolio.
Our results reveal the high prediction accuracy of using machine learning methods in forecasting rare earth stock
price direction which should be useful to investors, policy makers and venture capitalists.

1. Introduction transition needed to stave off catastrophic climate change.

The modern-day green technologies needed for the transition away
from fossil fuels such as clean energy, semiconductors and batteries
would not be viable without rare earths (Jyothi et al., 2020). So, what
are some of the uses of rare earths? Rare earth elements (REEs) include
Neodymium (Nd) – used in wind turbines, cell phones, computer hard
drives and hybrid/electric vehicles; Samarium (Sm) – used in guidance
systems and high-powered magnets; Cerium (Ce) – used in cell phones,
rechargeable batteries, cameras; Scandium (Sc) – used in aluminum al­
loys and aerospace components; Yttrium (Y) – used in efficient light
bulbs, and LCD and plasma screens; Europium (Eu) – used in LCD and
plasma screens, and optical electronics; Terbium (Tb) – used in cordless
power tools and guidance systems; Lanthanum (La) – used in catalytic
converters, hybrid and electric-car batteries, and cameras; and Gado­
linium (Gd) – used in MRI contrast agents and cancer therapy (Henri­
ques and Böhm, 2022; Hsu, 2019; Kanazawa and Kamitani, 2006). The
IEA (International Energy Agency, 2021, p. 50) has estimated that,
relative to 2021, the demand for REEs in clean energy technologies
(primarily for electric motor vehicles and wind turbines) in 2040 may be
three to seven times higher and will be critical to the clean technology
Henriques and Böhm (2022) provide a historical analysis of the rare
earth industry. From 1920 to 1949, the rare-earth industry began as a
military race for rare earths, followed by the United States dominating,
then losing the rare-earth market to China (1950–1990) and where from
1990 to 2009 China’s dominance continued nearly unchallenged.
Today, a worldwide clean-technology race for rare-earths propelled by
countries accelerating their investments in clean energy systems and by
the increased demand for electric cars, solar cells, wind turbines, and
battery power all requiring various REEs has begun (Bo et al., 2019;
International Energy Agency, 2021). To ensure a smooth energy tran­
sition to clean technologies, sufficient investment in diversifying rare
earth suppliers and boosting supply chain market resilience and trans­
parency are critical (International Energy Agency, 2021).
The International Energy Agency (2021) emphasizes the importance
of government policy in increasing investment in rare earths. Govern­
ments seeking to increase investment in rare earths have an interest in
rare earth stock prices for two main reasons. First, governments seeking
to increase rare earth mining need leading indicators of the industry in
order to craft their resources policy. Rare earth stock prices are a useful
leading indicator of the rare earth industry. Rare earth stock price

* Corresponding author.
E-mail addresses: ihenriques@schulich.yorku.ca (I. Henriques), psadorsky@schulich.yorku.ca (P. Sadorsky).

https://doi.org/10.1016/j.resourpol.2023.104248
Received 1 August 2022; Received in revised form 2 May 2023; Accepted 1 October 2023
Available online 10 October 2023
0301-4207/© 2023 Elsevier Ltd. All rights reserved.
I. Henriques and P. Sadorsky
forecasts are an important component to government mining policy that
determines mining royalty payments and licensing fees.
Second, governments may also play an active role investing in rare
earths through a Sovereign Wealth Fund (SWF). A SWF is a state-owned
investment fund financed, in many cases, by natural resource rents. For
example, in 2020 Angola’s SWF made an investment in Pensana Rare
Earths to help develop their rare earths mining project.1 SWFs have
specific rules of governance which are set up by their sponsoring gov­
ernment. For example, the risk and return profile of SWF investments
may be determined by government policy. Setting and monitoring risk
and return objectives require accurate forecasts of the underlying assets.
Rare earths do not have traded futures. As an alternative, investing and
risk management can be conducted using the stocks of companies
engaged in the extraction and refining of rare earths.2 For example, a
direct investment in rare earths cannot be hedged with futures but can
be hedged with an investment in rare earth stocks. Forecasts of rare
earth stock prices are crucial for understanding rare earth industry
trends and the risk management of rare earth investments.
The importance of rare earth stock price forecasting raises several
questions. First, which methods produce the most accurate forecasts of
rare earth stock prices? Second, how does forecast accuracy vary with
the forecast horizon? Third, which features are most important for
predicting rare earth stock prices? Fourth, how does a trading rule
constructed from a machine learner compare with a buy and hold
portfolio?
To address these research questions, we use the following approach.
First, we predict rare earth stock price direction. The reason for focusing
on stock price direction instead of stock prices is because of the signif­
icance of market timing. Fund managers and investors are most drawn to
the sign of asset prices as opposed to their actual value when making a
tactical asset allocation decision (Pesaran and Timmermann, 2002). For
example, portfolio managers may overweight assets that have a pre­
dicted positive trend and underweight or even short assets that have a
negative predicted trend. Interestingly, research has demonstrated that
asset price direction can be predicted with significant precision (Ballings
et al., 2015; Basak et al., 2019; Leung et al., 2000; Lohrmann and
Luukka, 2019; Nyberg, 2011; Nyberg and Pönkä, 2016; Pönkä, 2016).
Second, we forecast rare earth stock prices using machine learning
techniques. Machine learning methods/techniques are useful when the
data are complex. As discussed in the first paragraph of the introduction,
the demand for rare earths is driven by the automotive (electric vehi­
cles), clean energy, defense, health, and technology sectors. The supply
of rare earths is heavily dominated by just a few countries (Henriques
and Böhm, 2022; J. Wang et al., 2020a). Coupled with demand and
supply conditions; supply chain disruptions (Xia et al., 2023), national
security issues (Salim et al., 2022), and geopolitics (Shuai et al., 2023)
create complex dynamics for rare earth prices and rare earth stock pri­
ces. The metal price forecasting literature has found that metal price
dynamics are complex and high forecasting accuracy can be achieved
using machine learning methods like decision trees and random forests
(Díaz et al., 2020; Liu et al., 2017; Zhang et al., 2021), support vector
machine (Zhang et al., 2021), and neural networks (Khoshalan et al.,
2021; Sánchez Lasheras et al., 2015; Shi et al., 2023; Zhang et al., 2021).
Building on this literature, the machine learning methods employed in
this paper include random forests, extremely randomized trees (Extra
Trees), least absolute shrinkage and selection operator (Lasso), support
vector machine (SVM), recurrent neural networks (RNNs), and Naïve
Bayes. Random forests and extremely randomized trees are ensembles of
decision trees. SVM partitions the data using separating hyperplanes.
RNNs are a neural network that uses sequential pattern recognition
1
https://www.reuters.com/article/pensana-rare-equity-angola-idAF
L4N2GO0TR.
2
Fernandez (2017a) finds that rare earth stock prices tend to track rare earth
commodity prices closely.
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Resources Policy 86 (2023) 104248
between the nodes. Rather than relying on just one machine learning
method, six methods are used. This provides a comparison between
methods and adds an element of robustness to the analysis.
Third, we include technical indicators and market volatility as fea­
tures in our analysis. The literature on predicting asset prices has
identified the importance of technical indicators (Bustos and
Pomares-Quimbaya, 2020; Neely et al., 2014; Y. Wang et al., 2020b; Yin
et al., 2017; Yin and Yang, 2016) and stock price direction (Basak et al.,
2019; Sadorsky, 2021a, 2021b, 2022). Asset market volatility can affect
asset prices and the decision to invest. Higher volatility is associated
with higher uncertainty which can increase the cost of capital and create
incentives to postpone investment. This lowers growth forecasts, ex­
pected profitability and equity returns.
Fourth, we calculate multistep forecasts for one-day to twenty-days.
A five-day forecast represents a week of trading days while a 10-day
forecast represents two weeks of trading days. A 20-day forecast corre­
sponds to roughly one month of trading days. A multistep forecast ho­
rizon offers useful information on how prediction accuracy varies across
different forecast horizons.
Fifth, price direction forecasts are used to construct an equity port­
folio where an investment in rare earth stocks is made if the price di­
rection forecast is positive and no investment made otherwise. This
switching portfolio is compared to a buy and hold portfolio.
Several important findings emerge from our analysis. First, random
forests, extremely randomized trees, and support vector machine have
higher prediction accuracy than Lasso or Naïve Bayes. Random forests,
extremely randomized trees, and support vector machine each have
prediction accuracies greater than 85% for 10-day to 20-day forecasts.
Second, Shapley feature importance indicates WAD, MA200, VIX, MA50
and on balance volume are among the most important features for 5-day,
10-day and 20-day forecast horizons. Of the non-technical indicators,
VIX is, on average, the most important feature. Third, a switching
portfolio that uses trading signals from an Extra Trees model out­
performs a buy and hold portfolio.
The remainder of this paper proceeds as follows. Section 2 presents
some background literature. Section 3 describes our methodology. The
data are examined in Section 4 while Section 5 presents our empirical
results on forecast accuracy, feature importance and an equity portfolio
comparison. A discussion of the results and conclusion are found in
Sections 6 and 7 respectively.
2. Background literature
The existing literature has examined the impact of rare earth prices
on clean energy stock prices, renewable energy prices or the relationship
between rare earth stock prices and other asset prices. Baldi et al. (2014)
use multifactor models to help understand the relationship between the
prices of two rare earths (neodymium and dysprosium) on six clean
energy stock prices indices. Rising prices of dysprosium and neodymium
were found to have a negative impact on clean energy stock prices.
Apergis and Apergis (2017) use cointegration techniques to investigate
the relationship between rare earth prices and the consumption of
renewable energy. They find a negative relationship between rare earth
prices and renewable energy consumption both at the local and global
levels.
Fernandez (2017a) analyses selected rare earth prices and rare earth
stock prices. Systematic risk (beta) varies across time and by market
index. Rare earth stock price betas show considerable variation ranging
between − 1.0 and 4.0. Rare earth stock prices tend to track rare earth
commodity prices closely but there is a low correlation between rare
earth stock prices and the prices of other commodities. Chen et al.
(2020) use multivariate GARCH (BEKK, DCC) to examine the volatility
spillovers and dynamic correlations between international crude oil,
new energy, and rare earth markets in China. They find high spillovers
between new energy and rare earth markets. The rare earth market is
found to be the main source of these spillovers. Reboredo and Ugolini
I. Henriques and P. Sadorsky
(2020) use Markov switching models and vector autoregression (VAR)
to study the price transmission between global stock prices, rare earth
stocks, base metal stocks, clean energy stocks, oil prices, and gold prices.
In a low volatility regime, rare earth stocks prices are closely associated
with base metal stock prices and weakly linked to gold, oil, clean energy
and global stock prices. In a high volatility regime, however, there is
considerable co-movement between rare earth stock prices and the other
assets. Bouri et al. (2021) study the dynamic return and volatility rela­
tionship between rare earth stock prices and the stock prices of clean
energy, health care equipment, telecommunications, consumer elec­
tronics, and aerospace and defense. They use quantile connectedness to
investigate the tail dependence between these assets over the full sample
period as well as the COVID-19 period. Tail dependence increases during
periods of stress, but rare earths are receivers of spillovers for all of the
periods studied. Song et al. (2021) employ time-varying parameter
vector autoregression (TVP-VAR) to investigate the dynamic connect­
edness between rare earth stocks, clean energy stocks, world equities,
base metals, crude oil, and gold. They find that the volatility connect­
edness and return vary over the sample period. The rare earths equities
are mostly receivers of spillovers. Rare earth stocks have also exhibited a
stronger connectedness with other assets during the COVID-19 period.
Zheng et al. (2021) use Chinese company level data to study asymmetric
spillovers and connectedness between rare earth markets and new en­
ergy. They find that there exists a risk transfer between renewable en­
ergy markets and rare earth markets and that the network structure of
risk transfers changes between firms across time.
Several different methods have been used to forecast metal prices.
Some representative examples include the following. Dooley and Leni­
han (2005) find that ARIMA has slightly higher accuracy than lagged
forward models when predicting lead and zinc prices. Chen et al. (2010)
find that the exchange rates of major commodity producing countries
are good predictors of metal prices. Kriechbaumer et al. (2014) combine
wavelets with ARIMA to forecast the prices of aluminum, copper, lead,
and zinc. Wavelet multiresolution helps to increase the predictive ac­
curacy of the ARIMA models. He et al. (2015) find that a Curvelet
forecasting algorithm has higher metal price prediction accuracy than a
benchmark model. Chen et al. (2016) find that for forecasting aluminum
and nickel prices, a gray wave forecasting model outperforms an ARIMA
model. Fernandez (2017b) finds that the information content of futures
prices is somewhat limited for forecasting industrial metals prices.
Pincheira Brown and Hardy (2019) find that the Chilean exchange rate
has the ability to predict six base metals (aluminum, copper, lead,
nickel, tin, and zinc) that trade on the London Metal Exchange. For
forecasting aluminum, copper, lead, nickel and zinc prices, Fernandez
(2020) finds that the convenience yield and detrended oil price have
higher predictive power than interest rates and exchange rates for one to
twelve month out-of-sample forecasts. Rubaszek et al. (2020) find that
while mean reverting models outperform a random walk for forecasting
aluminum, copper, nickel, and zinc adding a threshold structure does
not increase forecasting performance. Kwas et al. (2021) use dynamic
factor models, vector autoregression (VAR), and a random walk to
forecast the real prices of aluminum, copper, nickel and zinc. They find
that for aluminum, nickel and zinc VAR models outperform the random
walk and dynamic factor models.
There is a developing literature that uses machine learning to fore­
cast metal prices. Sánchez Lasheras et al. (2015) find that neural net­
works outperform ARIMA models when forecasting COMEX copper spot
prices. Liu et al. (2017) find that decision trees produce high accuracy
for predicting copper prices. Building on the work of Liu et al. (2017),
Díaz et al. (2020) forecast copper prices using decision trees, random
forests, and gradient boosting. The random walk model, however, offers
comparable forecast accuracy. Khoshalan et al. (2021) found that
compared to gene expression programming, adaptive neo-fuzzy infer­
ence system, and ant colony optimization, ANN is better able to predict
copper prices. Zhang et al. (2021) use multi-layer perception (MLP)
neural network, k-nearest neighbors (KNN), support vector machine,
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Resources Policy 86 (2023) 104248
gradient boosting tree (GBT) and random forest to predict monthly
copper prices. They find that MLP has the highest accuracy. Shi et al.
(2023) use LSTM-GRU and LSTM-CNN models to forecast daily metal
prices. They find that these methods outperform particle swarm opti­
mization and the genetic algorithm. This discussion on forecasting
methods for metal prices indicates that, overall, nonlinear methods have
higher prediction accuracy.
Our literature review suggests that there is a knowledge gap with
respect to forecasting rare earth stock prices. The next section of the
paper describes the methods used for predicting rare earth stock prices.
3. Methods
The following methods are employed to predict the direction of rare
earth stock prices.
3.1. Naïve Bayes
The Naïve Bayes classifier is used to model and forecast a binary
response variable (James et al., 2022). Here the direction of stock price
changes can be classified as a binary variable. Positive stock price
changes from one period to another are classified as up. Non-positive
stock price changes from one period to another are classified as down.
The Naïve Bayes classifier uses Bayes theorem to make predictions.
Naïve Bayes models are easy to estimate and are often used as a
benchmark. In this paper, multi-step forecasts are produced to deter­
mine how forecast accuracy changes with the forecast horizon. Features
include technical indicators and asset market volatility. Technical in­
dicators are important predictors of asset prices (Bustos and
Pomares-Quimbaya, 2020; Neely et al., 2014; Y. Wang et al., 2020b; Yin
et al., 2017; Yin and Yang, 2016) and stock price direction (Basak et al.,
2019; Sadorsky, 2021a, 2021b, 2022). Asset market volatility affects
risk which in turn can affect asset prices (Banerjee et al., 2007; Brandt
and Kang, 2004; Cederburg et al., 2023).
3.2. The lasso
Another method is the Least absolute shrinkage and selection oper­
ator (Lasso). Lasso is a shrinkage estimator which is similar to ridge
regression (James et al., 2022). Whereas ridge regression shrinks
parameter estimates down to small but non-zero values, Lasso may set
parameter values equal to zero resulting in a sparse model. Compared to
regression or ridge regression, prediction accuracy can be enhanced by
using Lasso.
3.3. Random forests
Random forests (RFs) are ensembles of decision trees. The problem
with decision trees, however, is that they suffer from high variance as
modest changes in the data can produce large differences in the pre­
dictions. Random forests reduce variance by creating decorrelation be­
tween the trees (Breiman, 2001). More specifically, a large number of
decision trees are constructed using bootstrapped training samples. At
each split in a tree, a random sample of predictors is selected from the
full set of predictors. The number of predictors selected is determined by
the floor of the square root of the total number of predictors (James
et al., 2022). Although it may appear unintuitive to choose predictors at
random, taking the average of results from non-correlated trees is more
efficient at reducing variance than averaging highly correlated trees.
3.4. Extremely randomized trees
Extremely randomized trees which are often referred to as Extra
Trees, is a decision tree ensemble method akin to random forests (Geurts
et al., 2006). Similar to RFs, at each split Extra Trees selects a randomly
chosen subset of predictors, but unlike RFs, which chooses the best fit for
I. Henriques and P. Sadorsky
each predictor, Extra Trees chooses the best fit from a randomly chosen
small number of split points for each of the selected predictors. In the
simplest case, one random split is chosen for each randomly selected
feature. Extra Trees subsequently selects the best split from the smaller
number of choices. This ensemble of trees comprises trees that have
greater variability but have less correlation than the trees derived from
the random forests method (Geurts et al., 2006). Extra Trees requires
less computational time than RFs because splits are randomly chosen.
3.5. Support vector machine
SVM is a machine learning method/technique that works by parti­
tioning a dataset into clusters employing a boundary. This boundary is a
hyperplane (James et al., 2022). Many hyperplanes can be used to
separate the data and what is of greatest interest is the optimal hyper­
plane or maximum margin hyperplane (MMH). The MMH is the hy­
perplane that has the biggest separation between the groups of data and
located using a search algorithm. Support vectors are defined as the
points from each cluster that are closest to the MMH. Support vectors
can be easily discovered for linear separable data but, in the case of
nonlinear separable data, more advanced vector geometry is required.
More specifically, data are mapped into higher dimensional space using
kernels. The benefit of kernel mapping is that a nonlinear relationship in
a low dimensional space may be linear in higher dimensional space
thereby reducing complexity.
3.6. Recurrent neural network
Recurrent neural network (RNN) is a machine learning method that
uses a sequential approach to using data (James et al., 2022). RNNs take
information from prior inputs and use this information to update the
learning process to generate outputs. The learning algorithm uses back
propagation and gradient descent. An RNN has an input layer, an output
layer, and usually several hidden layers to capture the complexity of the
data.
3.7. Setup of the models
To avoid look ahead bias the features were lagged by one day. The
dataset was randomly split so that 70% of the data were employed for
model training and 30% were used for testing the accuracy of the
methods. Five hundred trees were used to estimate random forests and
extremely randomized trees. Here predictors were randomly chosen
using the floor of the square root of the number of features at each split.
Provided many trees are chosen, random forest models are not sensitive
to the number of trees. More specifically, a very large number of trees
does not result in overfitting, whereas a small number of trees can lead
to high test error. Preliminary analysis indicated that 500 trees were
more than enough to accommodate any decrease in test error.
The SVM used in this paper uses a radial basis function with two
tuning parameters - a cost parameter and a gamma parameter. A 10-fold
cross validation with 10 repeats were used to determine the optimal
values of these parameters. A grid search from a list of values (0.1, 1, 10,
100, 1000) was used to choose the cost parameter. The gamma
parameter was chosen using grid search from the following list of values
(0.2, 0.5, 1, 2, 3, 4). Distance-based algorithms are impacted by the
range of features. Since a distance-based algorithm is used in the
computation of SVMs, we scaled the features to have a mean of zero and
unity standard deviation. Data scaling was not applied to the random
forests or extremely randomized trees as splitting on nodes takes place
on a single feature and not a range of features.
Training the RNN is not as easy as for the other methods used in this
paper. There are no well accepted guidelines on how many hidden layers
to use or how many neurons to include. The training process involves a
trial and error process (Zhang et al., 2021). The training process can be
computationally demanding. The data were scaled as for the case of
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Resources Policy 86 (2023) 104248
SVM. The number of epochs was set at 800. A rectified linear unit
activation function was used. The objective criterion is cross entropy
loss and the optimizer was Adam. The learning rate was 0.01. The input
layer has 17 nodes (17 features) and the output layer has 2 nodes
(classification). For the hidden layers, several different configurations
were tried. The number of hidden layers was varied between two and
three. The number of nodes per layer varied between 8 and 16. The final
model was 17-8-16-2.
Different measures of forecast accuracy can be constructed from the
confusion matrix. One such measure is prediction accuracy. Prediction
accuracy is calculated as the number of true positives and true negatives
divided by the total number of predictions. Prediction accuracy ranges
from zero to unity and is sometimes expressed as a percentage. Another
measure is the kappa statistic which adjusts forecast accuracy by ac­
counting for the possibility of a chance occurrence of a correct predic­
tion. Consequently, the kappa statistic is a better accuracy indicator than
the standard accuracy measure when the classification data are unbal­
anced. The F1 score, sometimes called the F measure, is a performance
measure combining precision and recall into a single number. The F1
score is a convenient measure for comparing models and like kappa, is a
better measure of prediction accuracy when classification data are
unbalanced.
Variable importance is explained using Shapley values. Conditional
game theory provides the theoretical justification for computing Shapley
values. Basically, the Shapley value represents the contribution of each
variable towards the predicted value compared to the average predic­
tion for the data set (Lundberg and Lee, 2016, 2017). Consider the
calculation of a Shapley value for one feature, say X1. The accuracy of
every combination of features not including X1 is recorded and then a
comparison is conducted to see how adding X1 to each combination
improves the accuracy. Shapley values are more robust and theoretically
consistent than a permutation based variable importance approach. The
tradeoff is that Shapley values are computationally intensive which
takes much more execution time. All possible coalitions of feature values
have to be estimated with and without the feature of interest in order to
calculate the exact Shapley value. As the number of features increases
this becomes computational intractable. In practice Monte-Carlo sam­
pling is used to approximate the required computations. In this paper,
100 Monte-Carlo simulations were used. Shapley Additive exPlanations
(SHAP) are based on Shapley values but include information for the how
the size and sign of a feature affects the prediction outcomes.
Estimation was conducted using the R software (R Core Team, 2022).
More specifically, we employed the following R packages: e1071 pack­
age (Meyer et al., ); random forests machine learning package (Breiman
et al., 2018); ranger package (Wright et al., 2022); fastshap package
(Greenwell, 2021); torch (Falbel et al., 2023), and caret package (Kuhn
et al., 2020). For portfolio analysis the PerformanceAnalytics package
was used (Peterson et al., 2020).
4. Data
To undertake our analysis, we collected daily rare earth stock prices
and some important market uncertainty data. Rare earth stock prices are
measured using the VanEck Rare Earth/Strategic Metals ETF (REMX).
This is the largest and most liquid rare earth exchange traded fund
(ETF). The REMX is invested in companies that are focused on activities
related to the production, refining, and recycling of rare earth elements
and strategic metals. Companies included in REMX must generate at
least 50% of their revenue from rare earths. As of March 31, 2023, the
top ten holdings account for 60% of total assets.3 The top ten holdings
are China Northern Rare Earth (Group) High-Tech Co Ltd, Zhejiang
Huayou Cobalt Co Ltd, Liontown Resources, Pilbara Minerals, Allkem
3
https://www.vaneck.com/us/en/investments/rare-earth-strategic-metals-
etf-remx/.
I. Henriques and P. Sadorsky
Ltd., Lynas Rare Earths Ltd, MP Materials Corp, Sigma Lithium, Livent
Corp, and Xiamen Tungsten Co Ltd. In terms of country representation,
the top five countries are Australia (40%), China (30%), United States
(14%), Canada (6%), and Brazil (5%).
The features used to predict rare earth stock prices consist of tech­
nical indicators and stock market volatility. The technical indicators
used include the 50-day and 200-day moving averages, stochastic
oscillator (slow, fast), advance – decline line (ADX), the relative strength
indicator (RSI), moving average cross-over divergence (MACD), on
balance volume (OnBalanceVolume), money flow index (MFI), price
rate of change (ROC), and the Williams accumulation and distribution
(WAD) (Achelis, 2013). The default settings in the R package TTR are
used to calculate technical indicators (Ulrich, 2020).
Asset price volatility is a measure of risk and can have an important
impact on stock prices. High levels of volatility coincide with stock
market turmoil. Banerjee et al. (2007) find that the VIX is a good pre­
dictor of stock returns. The VIX is the CBOE volatility index representing
the US stock market expectations of volatility for the next 30 days.
Christoffersen and Diebold (2006) find that sign probability forecast are
impacted by volatility (VIX). Bekiros and Georgoutsos (2008) use
recurrent neural networks (RNN) to predict the price direction of the
S&P500. They find that the VIX is an important predictor. Oil market
volatility may also be an important predictor of rare earth stock prices
because the oil market incorporates business cycle information about
the demand and supply of oil as well as geopolitical information. OVX
provides an estimate of the expected US crude oil price volatility over
the next thirty days. The VXN is an estimate of technology stock market
volatility over the next 30 days and may affect REMX since rare earths
are used in the production of electronics. The absolute return of the
iShares Global Clean Energy ETF (ICLN) are included to represent clean
energy stock price volatility. ICLN is the largest clean energy stock price
ETF by market capitalization. ICLN volatility is included to account for
the fact that rare earths are used in clean energy products and processes.
All data are retrieved from Yahoo Finance. The daily dataset covers
the period October 28, 2010 (the first day REMX price data are avail­
able) to February 28, 2023. The variables VIX, OVX, VXN, and the ab­
solute returns of ICLN are smoothed using a five-day moving average.
A plot of REMX adjusted closing prices shows a downward trend
from the start of the sample period to the middle of 2015 (Fig. 1a). From
late 2015, REMX prices increased until 2017 and then declined before
trending upwards in 2019. The REMX prices are heavily affected by
events that impact the supply and demand of REEs. The year 2010 was
Fig. 1a. Time series plot of REMX stock prices.
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Resources Policy 86 (2023) 104248
characterized by a rare earth crisis and its impact on REMX is pro­
nounced.4 Trade tensions between China and Japan resulted in
increased prices for rare earths to Japan which affected Japanese high-
tech manufacturing. The price of rare earths spiked even further when
China cut export quotas by 40%. This event was shocking because, for
the first time, many companies had to deal with the fact that China was
the world’s dominant producer of rare earths and could use this
advantage to advance geopolitical issues. As a result of a 2014 World
Trade Organization (WHO) ruling against China’s rare-earths export
restrictions, China loosened export quotas in 2016 causing rare-earth
prices to plummet pushing many rare earth producers outside of
China such as Lynas to near bankruptcy (Henriques and Böhm, 2022;
Early 2020 saw an increase in the rare earth stock prices owing to both
the 2019 US-China trade embargo and the COVID-19 pandemic.
We observe large increases in volatility (VIX, OVX, VXN, and ICLN)
around March 2020 when the World Health Organization (WHO)
declared COVID-19 a pandemic (Fig. 1b). Although these values have
decreased since March 2020, variability has yet to match pre-COVID-19
levels. In fact, the most recent values from March 2023 indicate a slight
downward trend. The absolute value of ICLN has, in addition to the
onset of COVID-19, experienced several large spikes in volatility.
Over the sample period, REMX has a slightly negative mean value
indicating that the overall trend in the data was down (Table 1). The
volatility variables (VIX, OVX, VXN, and ICLN) each have positive mean
values and the coefficient of variation indicates that ICLN is the most
variable while VXN is the least variable. The null hypothesis of normally
distributed data is rejected for all variables.
5. Results
Results from predicting rare earth stock price direction are reported
Fig. 1b. Time series plots of five period moving averages of VIX, OVX, VXN,
and the absolute returns of ICLN.
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lements-history-future.
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Table 1
Summary statistics.
median mean std.dev coef.var skewness kurtosis W W(p)

REMX 0.000 − 0.020 2.102 − 107.044 − 0.196 3.920 0.969 0.000

VIX 16.616 18.413 7.111 0.386 2.342 10.083 0.820 0.000
OVX 34.316 37.617 18.035 0.479 4.456 32.147 0.671 0.000
VXN 18.968 21.256 7.413 0.349 1.590 4.224 0.866 0.000
ICLN 0.011 0.012 0.008 0.632 2.976 18.737 0.797 0.000

Data for the period October 29, 2010 to February 28, 2023. REMX is measured in log returns. VIX, OVX and VXN are five-period moving averages of their respective
values. ICLN is a five-period moving average of the absolute value of log returns. W represents the Wilcox test for normality and W(p) is the associated p-value.

in this section. The most striking observation about the prediction ac­
curacy is that after 10 days, random forests, RNN, Extra Trees, and SVM
have much higher prediction accuracy than Lasso or Naïve Bayes
(Fig. 2). Between one day and eight days the prediction accuracy of
random forests, Extra Trees, and SVM increases quickly to 85%. At 20
days, random forests, Extra Trees, RNN, and SVM have accuracy
approaching 90%. The Extra Trees is particularly impressive as it rea­
ches accuracy of slightly over 90% in the 12-day to 20-day range. By
comparison, Lasso never reaches an accuracy higher than 67% while the
Naïve Bayes accuracy is generally less than 60%.
The kappa values presented in Fig. 3 show a pattern that are similar
to those depicted in Fig. 3. Random forests, Extra Trees, RNN, and SVM
have the highest kappa values. Lasso and Naïve Bayes have the lowest
kappa values.
The prediction accuracy can also be assessed using the F1 measure
(Fig. 4). Consistent with the results in Figs. 2 and 3, random forests,
Extra Trees, RNN, and SVM have the highest accuracy while Lasso and Fig. 3. Kappa values for REMX price direction prediction.
Naïve Bayes have lower F1 values.
The random forest model can be used to calculate Shapley feature
importance. Here, features with large absolute Shapley values are more
important than features with small absolute Shapley values. For
assessing global feature importance, the average of the absolute Shapley
values per feature is calculated. Looking first at the Shapley feature
importance for a 20-day forecast horizon, WAD is the most important
feature (Fig. 5). WAD changes the predicted probability of being in the
UP state by on average 6% (0.06 on the horizontal axis). After WAD, the
next most important features are MA200, MA50, OnBalanceVolume, and
VIX. Feature importance drops off abruptly after VIX. Notice that these
five features (WAD, MA200, VIX, MA50 and OnBalanceVolume) are
among the most important features for 5-day, 10-day and 20-day fore­
cast horizons although the ranking of these features changes slightly
depending on the forecast horizon. For one day forecasts OnBalance­
Volume is the most important feature. Overall, the technical indicator
features tend to be more important than the volatility features.
The Shapley value reported in Fig. 5 show the importance of each Fig. 4. F1 values for REMX price direction prediction.
feature but does not provide information on the sign of the features.
SHAP values provide information on both the importance and the sign of the feature value. Fig. 6 shows SHAP values calculated from a random
forest for 20-day forecasts. Notice that the ranking of the features is the
same as those in Fig. 5. WAD and MA200 are the most important features
and for each of these features lower values indicate higher importance.
The next most important group of features are MA50, OnBalanceVo­
lume, and VIX. It is also the case that for each of these features lower
values indicate higher importance. MACDSignal is an example of a
feature where higher feature values have greater importance.
The results thus far have been obtained by randomly splitting the
dataset into a training dataset and a test dataset (a cross-validation (CV)
approach). Random shuffling of the data, however, may lead to inac­
curate predictions if the time series features in the data are not pre­
served. Bergmeir et al. (2018) discuss this and demonstrate that with
autoregressive models k-fold cross validation is useful when errors are
uncorrelated. As the focus of our paper is predicting a classification
variable rather than a continuous variable (REMX price direction) and
some of our technical features such as WAD, MA50 and MA200 contain
significant past information on stock prices, the residual serial correla­
Fig. 2. REMX price direction prediction accuracy. tion is assuaged.

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I. Henriques and P. Sadorsky Resources Policy 86 (2023) 104248

Fig. 5. Shapley values for 1-day forecast horizon (top left), 5-day forecast horizon (top right), 10-day forecast horizon (bottom left), and 20-day forecast horizon
(bottom right). Shapley values computed from a random forest.

window approach to predict REMX price direction. Extra Trees had the
highest accuracy for most of the forecasts. The initial training dataset to
construct predictions from one period through to twenty periods uses
the first 70% of the data. Subsequently, one additional observation is
added to the end of the training data set while the earliest observation is
removed, and predictions are recomputed. The fixed window of training
data is rolled through the data until the end of the data is attained. These
predictions are referred to as time-series cross-validation (tsCV).
For 10-day forecasts the CV value of 0.8952 is similar to the tsCV
value of 0.8708 (Table 2). It is also the case that for the 20-day forecasts,
the CV accuracy of 0.9214 is similar to the tsCV accuracy of 0.9109. The
same pattern is observed for kappa and F1 where for a particular forecast
horizon, the CV and tsCV values are similar. It is concluded that CV and
tsCV approaches produce similar accuracy values.
It is important to evaluate the practical significance of the forecasts.
To do so a portfolio comparison is made between a buy and hold (B&H)
portfolio and a switching (Switch) portfolio that uses the price direction
forecasts from Extra Trees to make an investment in REMX. The Extra

Table 2
Extra Trees prediction accuracy comparisons for REMX.
10-day 20-day

Acc CV 0.8952 0.9214

tsCV 0.8708 0.9109
Kappa CV 0.7892 0.8424
Fig. 6. SHAP values for random forests 20-day forecasts. tsCV 0.7373 0.8157
F1 CV 0.8870 0.9169
tsCV 0.8855 0.9246
To gain additional insight, we use an Extra Trees rolling fixed

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I. Henriques and P. Sadorsky Resources Policy 86 (2023) 104248

Trees model is used since it has the highest accuracy in the 10-day to 20-
day range. If the price direction forecast is positive, then invest in REMX
for the duration of the forecast period. Otherwise do not invest in REMX.
Trading signals are created using the previously described tsCV
approach. Portfolio summary statistics are shown in Table 3. For 10-day
forecasts, the B&H portfolio has a mean value of 0.361 (36.1%)
compared to the switching portfolio mean value of 1.426 (143%). The
switching portfolio has a higher mean return, Sharpe ratio, and Omega
value.5 The switching portfolio has lower standard deviation, value at
risk (VaR), and expected shortfall (ES) values. Thus, the switching
portfolio has a higher return to risk ratio. It is also the case that for 20-
day forecasts, the swathing portfolio outperforms the B&H portfolio.
The superiority of the switching portfolio is demonstrated visually by
the equity curves shown in Figs. 7 and 8.

6. Discussion

Fig. 7. Equity curves (Extra Trees, 10 day forecasts).

Rare earth elements are a group of 15 elements that are classified as
part of the lanthanide series in the periodic table of elements. The REEs
have atomic numbers between 57 and 71. Scandium and yttrium are not
members of the lanthanide series but given their similar properties to the
lanthanide series are often classified as rare earth elements. REEs are
essential to the high-technology society that we live in. REEs are widely
used in electronics, clean energy, health care technology, automotive
(electric vehicles), and defense. The US was the world’s largest supplier
of REEs until the 1990s when China aggressively entered the industry.
By 2012, China was the world’s largest supplier of REEs and currently
holds monopoly power over the processing of REEs (Bo et al., 2019). The
demand for REEs is expected to grow rapidly in the coming years with
the expansion of technological innovation and clean energy adoption.
Consequently, an increased demand for REEs needs to be met with
increased investment for locating, producing and processing REEs.
The introduction of this paper presented several research questions.
The first two research questions were “which methods produce the most
accurate forecasts of rare earth stock prices” and “how does forecast
accuracy vary with the forecast horizon?” Building on research showing
that machine learning methods have higher accuracy when predicting Fig. 8. Equity curves (Extra Trees, 20-day forecasts).
complex metal price data, this paper used six machine learning methods
(random forests, RNN, SVM, extremely randomized trees, Lasso, and the highest prediction accuracy. For forecasts in the 10-day to 20-day
Naïve Bayes) to forecast rare earth stock price direction. Forecasts were range, random forests, extremely randomized trees, and support vec­
computed over a multi-step horizon to see how prediction accuracy tor machine have prediction accuracies greater than 85%. Lasso never
changes with the forecast period. Rare earth stock prices are measured achieves an accuracy greater than 67% while the accuracy of Naïve
using the REMX ETF and the features consist of technical indicators and Bayes is less than that of Lasso. The extremely randomized trees method
market volatility measures. Random forests, Extra Trees and SVM have is particularly attractive because it has high prediction accuracy (in
excess of 90% over the 12-day to 20-day range) and takes less compu­
tational time than either random forests or SVM. Forecast accuracy in­
Table 3 creases quickly over the one-day to eight-day period for random forests,
Portfolio summary statistics for a buy and hold (B&H) portfolio and a switching Extra Trees, SVM, and RNN. Between 15-days and 20-days, the accuracy
portfolio using trading signals generated from an Extra Trees model. of these models is in the range between 87% and 91%. These results are
10-day 20-day in line with the metal price forecasting literature that has found random
B&H Switch B&H Switch forests (Díaz et al., 2020; Liu et al., 2017; Zhang et al., 2021), support
vector machine (Zhang et al., 2021), and neural networks (Khoshalan
mean 0.361 1.426 0.360 1.263
sd 0.439 0.254 0.439 0.330
et al., 2021; Sánchez Lasheras et al., 2015; Shi et al., 2023; Zhang et al.,
Sharpe 0.793 5.524 0.792 3.767 2021) have high accuracy for forecasting metal prices.
Omega 1.166 2.427 1.166 1.766 The third research question was “which features are most important
VaR − 0.042 − 0.021 − 0.042 − 0.030 for predicting rare earth stock prices?” Feature importance was assessed
ES − 0.058 − 0.031 − 0.058 − 0.043
using Shapley values. For forecasts in the 5-day to 20-day range, WAD,
The mean, standard deviation (sd), and Sharpe ratio are calculated using MA200, VIX, MA50 and OnBalanceVolume are the most important
annualized values. ES and VaR calculated at the 5% level using historical values. features. These results lend support to research on the importance of
technical indicators for predicting stock price direction. Of the non-
technical indicators VIX is the most important. OVX and VXN are
important but ICLN is not very important.
5 The fourth research question was “how does a trading rule con­
For the Sharpe calculation, the risk-free rate was set at 1% which is the
average annual yield on a 3 month T bill for the time period under study.
structed from a machine learner compare with a buy and hold portfo­
Trading costs were assumed negligible which is consistent with institutional lio?” To answer this question portfolio comparisons were made between
trading or brokerage accounts that offer no fees for trading ETFs. a buy and hold portfolio and a portfolio that uses price direction

8
I. Henriques and P. Sadorsky
predictions from an Extra Trees model to produce trading signals.
Portfolios constructed from 10-day and 20-day forecasts show the Extra
Trees based switching portfolios have higher risk adjusted performance
and lower VaR and expected shortfall. In particular, the switching
portfolios using signals from Extra Trees had higher Sharpe ratios and
Omega than their corresponding buy and hold portfolios.
The market for rare earths is affected by trade disputes, geopolitical
tensions, and supply chain disruptions. As countries realize the critical
and strategic importance of REEs, they are turning their attention to­
wards developing their own domestic rare earth elements industry.
While countries can enact resource policies to promote the exploration,
mining, and processing of rare earth elements, the development of rare
earth industries requires massive amounts of financial capital. A suc­
cessful rare earths resource policy needs to provide specifics about
financing as companies move through various stages of development.
Governments, via subsidies, tax breaks, and special or strategic funding
initiatives, can provide early stage financing to companies specializing
in REEs. In order to make successful policy decisions about rare earth
mining governments need rare earth industry trend indicators. Rare
earth stock prices can act as an overall gauge of the strength of the rare
earths industry. Thus, rare earth stock price forecasts are important in­
puts into government mining policy that determines mining royalty
payments and licensing fees.
Governments can also invest in rare earths through SWFs. SWFs are
set up by government policy and have specific guidelines regarding their
investing objectives. Unlike many other commodities, rare earths do not
have traded futures markets. As a substitute, risk management of rare
earths can be conducted using rare earths equities. Accurate forecasts of
rare earth stock prices are central to the risk management of rare earths.
For example, if rare earth stock prices are predicted to fall, then a short
position can be taken to offset downside risk. The results presented in
this paper on forecasting rare earth stock prices provides useful infor­
mation on which methods to use, which features are most important,
and the practical implications of using a trading strategy based on Extra
Trees.
7. Conclusions
Rare earth elements are very much in demand for their usage in the
production of electronic and clean energy equipment. To put it simply,
REEs are essential to the technology-oriented society we live in. Future
demand for rare earths elements is projected to grow rapidly and this
will require an increase in investment in the rare earths sector. Rare
earth stock prices can act as an indicator of the strength of the rare earth
industry and in the absence of rare earths futures markets can be used for
risk management. To date, however, little is known about predicting
rare earth stock prices. The purpose of this research is to predict rare
earth stock prices and learn something about which features are most
important.
The analysis reported in this paper shows that rare earth stock price
direction prediction accuracy is high for random forests, Extra Trees,
RNN and SVM and lower for Lasso and Naïve Bayes. For 10-day to 20-
day forecasts random forests, extremely randomized trees, and support
vector machine achieve prediction accuracies greater than 85%. These
results are important in demonstrating the high accuracy of using
random forests, Extra Trees and SVM to predict rare earth stock price
direction. Extra Trees has prediction accuracy greater than 90% for
forecasts in the range of 12-days to 20-days and have the added benefit
of having the fastest computation time. It is recommended that
extremely randomized trees be used to calculate fast and accurate pre­
dictions of rare earth stock price direction.
Shapley values indicate that WAD, MA200, VIX, MA50 and on bal­
ance volume are among the most important features for 5-day, 10-day
and 20-day forecast horizons. Four of these features are technical in­
dicators. Of the non-technical indicators VIX is the most important.
SHAP values show that lower values of these features result in greater
9
Resources Policy 86 (2023) 104248
importance. In choosing features for predicting rare earth stock prices, it
is recommended that these variables be included.
The practical implications from forecasting rare earth stock prices
are demonstrated by comparing a buy and hold portfolio with a
switching portfolio that uses trade signals generated from Extra Trees
price direction forecasts. The switching portfolio has higher risk
adjusted returns.
There are several future research directions. It may be of interest to
expand the number of features to include business cycle and monetary
variables. Although some of the impact of these variables are already
accounted for in the existing feature set, there may be other aspects or
nuances worth exploring. Another future direction could be to take a
longer-term forecast horizon. The analysis in this paper was conducted
using daily data and forecasts from one day to twenty days. Forecasts
using lower frequency data like monthly or quarterly may also be useful
for investors and policy makers.
CRediT author statement
Perry Sadorsky: Conceptualization, Data curation, Methodology,
Software, Writing- Original draft preparation, Writing- Reviewing and
Editing. Irene Henriques: Conceptualization, Methodology, Writing-
Original draft preparation, Writing- Reviewing and Editing.
Declaration of competing interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Acknowledgements
We thank the Guest Editors (Qiang Ji, Duc Khuong Nguyen, Dayong
Zhang) and the anonymous reviewers for their helpful comments. Irene
Henriques’ research is supported by funding from the Social Sciences
and Humanities Research Council of Canada (SSHRCC) grant number
435-2018-1104.
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