Estimating Endogenously the Financial Profiling for Detecting Financial Risk and Future Trends of Returns Using Data Mining Approach: A Case of Pakistan

Abstract

Risk and return analysis plays a significant role in investor’s decision making process. The present study investigates the influence of risk on financial performance of each financial market such as capital market, bond market, derivatives market foreign exchange market of Pakistan. Investor needs to invest money in the assets where risk is less. This means that investor would like to see risk and return exploration of all financial markets before buying financial assets. This requires in-depth analysis of financial performances of all financial markets for decision making under risk and uncertainty. Data mining technique considered to be very successful in order to evaluate the financial performances of all financial markets to generate useful information and knowledge. For the analysis in this research, three algorithms are designed; j48 decision tree classifier, linear regression and financial forecasting. The study shows statistically significant results that investment in capital market produces statistically significant desirable outcomes and the impact of risk on capital market’s returns is statistically significant. Out of four financial markets capital market is performing best with 99% coefficient correlation then comes bond market with 93% coefficient correlation. Foreign exchange market stands on third position with 91% coefficient correlation then comes derivatives market with 87% coefficient correlation. Furthermore in future capital market returns will be consistent while derivatives market will produce high returns in future.