Why Regression? Binary Encoding Classification Brings Confidence to Stock Market Index Price Prediction

TL;DR

This paper introduces Cubic, a novel framework that models constituent stock interactions and reformulates index prediction as a binary encoding classification task, leading to improved accuracy and trading profitability.

Contribution

Cubic's main novelty lies in latent space fusion, binary encoding classification, and confidence-guided prediction, addressing limitations of traditional regression-based index forecasting methods.

Findings

Cubic outperforms state-of-the-art baselines in prediction accuracy.

Cubic achieves higher trading profitability.

The framework effectively models stock interdependencies.

Abstract

Stock market indices serve as fundamental market measurement that quantify systematic market dynamics. However, accurate index price prediction remains challenging, primarily because existing approaches treat indices as isolated time series and frame the prediction as a simple regression task. These methods fail to capture indices' inherent nature as aggregations of constituent stocks with complex, time-varying interdependencies. To address these limitations, we propose Cubic, a novel end-to-end framework that explicitly models the adaptive fusion of constituent stocks for index price prediction. Our main contributions are threefold. i) Fusion in the latent space: we introduce the fusion mechanism over the latent embedding of the stocks to extract the information from the vast number of stocks. ii) Binary encoding classification: since regression tasks are challenging due to continuous value estimation, we reformulate the regression into the classification task, where the target value is converted to binary and we optimize the prediction of the value of each digit with cross-entropy loss. iii) Confidence-guided prediction and trading: we introduce the regularization loss to address market prediction uncertainty for the index prediction and design the rule-based trading policies based on the confidence. Extensive experiments across multiple stock markets and indices demonstrate that Cubic consistently outperforms state-of-the-art baselines in stock index prediction tasks, achieving superior performance on both forecasting accuracy metrics and downstream trading profitability.