Neural Networks in Finance

2 What Are Neural Networks?

2.1 Linear Regression Model

The rationale for the use of the neural network is forecasting or predicting a given target or output variable y from information on a set of observed input variables x. In time series, the set of input variables x may include lagged variables, the current variables of x, and lagged values of y. In forecasting, we usually start with the linear regression model, given by the following equation:

     (2.1a)

     (2.1b)

where the variable ε_t is a random disturbance term, usually assumed ...