An investigation of model selection criteria for neural network time series forecasting

Artificial neural networks (ANNs) have received more and more attention in time series forecasting in recent years. One major disadvantage of neural networks is that there is no formal systematic model building approach. In this paper, we expose problems of the commonly used information-based in-sample model selection criteria in selecting neural networks for financial time series forecasting. Specifically, Akaike’s information criterion (AIC) and Bayesian information criterion (BIC) as well as several extensions have been examined through three real time series of Standard and Poor’s 500 index (S&P 500 index), exchange rate, and interest rate. In addition, the relationship between in-sample model fitting and out-of-sample forecasting performance with commonly used performance measures is also studied. Results indicate that the in-sample model selection criteria we investigated are not able to provide a reliable guide to out-of-sample performance and there is no apparent connection between in-sample model fit and out-of-sample forecasting performance.