Comparing classic time series models and the LSTM recurrent neural network: An application to S&P 500 stocks

In the financial literature, there is great interest in the prediction of stock prices. Stock prediction is necessary for the creation of different investment strategies, both speculative and hedging ones. The application of neural networks has involved a change in the creation of predictive models. In this paper, we analyze the capacity of recurrent neural networks, in particular the long short-term recurrent neural network (LSTM) as opposed to classic time series models such as the Exponential Smooth Time Series (ETS) and the Arima model (ARIMA). These models have been estimated for 284 stocks from the S&P 500 stock market index, comparing the MAE obtained from their predictions. The results obtained confirm a significant reduction in prediction errors when LSTM is applied. These results are consistent with other similar studies applied to stocks included in other stock market indices, as well as other financial assets such as exchange rates.