Anomalous Returns in a Neural Network Equity-Ranking Predictor
  Using an artificial neural network (ANN), a fixed universe of approximately 1500 equities from the Value Line index are rank-ordered by their predicted price changes over the next quarter. Inputs to the network consist only of the ten prior quarterly percentage changes in price and in earnings for each equity (by quarter, not accumulated), converted to a relative rank scaled around zero. Thirty simulated portfolios are constructed respectively of the 10, 20,..., and 100 top ranking equities (long portfolios), the 10, 20,..., 100 bottom ranking equities (short portfolios) and their hedged sets (long-short portfolios). In a 29-quarter simulation from the end of the third quarter of 1994 through the fourth quarter of 2001 that duplicates real-world trading of the same method employed during 2002, all portfolios are held fixed for one quarter. Results are compared to the S&P 500, the Value Line universe itself, trading the universe of equities using the proprietary ``Value Line Ranking System'' (to which this method is in some ways similar), and to a Martingale method of ranking the same equities. The cumulative returns generated by the network predictor significantly exceed those generated by the S&P 500, the overall universe, the Martingale and Value Line prediction methods and are not eroded by trading costs. The ANN shows significantly positive Jensen's alpha, i.e., anomalous risk-adjusted expected return. A time series of its global performance shows a clear antipersistence. However, its performance is significantly better than a simple one-step Martingale predictor, than the Value Line system itself and than a simple buy and hold strategy, even when transaction costs are accounted for. 
J.B. Satinover (Univ. Nice) and D. Sornette (ETH Zurich)