Movement Prediction-Adjusted Naive Forecast: Is the Naive Baseline Unbeatable in Financial Time Series Forecasting?
This addresses the problem of improving forecasting accuracy for financial analysts, but it is incremental as it builds on existing naive methods with directional adjustments.
The study tackled the challenge of beating the naive forecast in financial time series by introducing MPANF, a method that adjusts the naive forecast using directional information, and found it generally outperforms common benchmarks like the naive forecast and linear regression on eight financial series with metrics such as RMSE and MAE.
In financial time series forecasting, the naive forecast is a notoriously difficult benchmark to surpass because of the stochastic nature of the data. Motivated by this challenge, this study introduces the movement prediction-adjusted naive forecast (MPANF), a forecast combination method that systematically refines the naive forecast by incorporating directional information. In particular, MPANF adjusts the naive forecast with an increment formed by three components: the in-sample mean absolute increment as the base magnitude, the movement prediction as the sign, and a coefficient derived from the in-sample movement prediction accuracy as the scaling factor. The experimental results on eight financial time series, using the RMSE, MAE, MAPE, and sMAPE, show that with a movement prediction accuracy of approximately 0.55, MPANF generally outperforms common benchmarks, including the naive forecast, naive forecast with drift, IMA(1,1), and linear regression. These findings indicate that MPANF has the potential to outperform the naive baseline when reliable movement predictions are available.