Simulation analysis of artificial neural network and XGBoost algorithms in time series forecasting

Purpose: The aim of the article was to prepare a simulation analysis of artificial neural network and XGBoost algorithm with determining which of the method was characterized by a lower level of forecast errors for time series predictions. Design/methodology/approach: The objective of the article was reached by applying, a simulation study on a sample of 1000 artificially generated time series. The analyzed XGBoost algorithm and the artificial neural network ANN model were intended to prepare forecasts for five periods ahead. These forecasts were compared with the actual implementations of the time series and proposed forecast error measures. Findings: It is possible to use simulated time series to check which of the presented algorithms were characterized by a lower forecast error. The study showed that applying of the artificial neural networks ANN to forecast future observations generated a lower level of MAPE, MAE and RMSE errors than in the case of the XGBoost algorithm. It was found that both methods generate a lower level of forecast error for time series characterized by a high level of mean value, standard deviation and variance, and levels of kurtosis and skewness close to 0. Practical implications: The research results can be used by both investors and enterprises to better adjust their business decisions to changing market prices by using a model with a lower forecast bias. Originality/value: The original contribution of this article is a comprehensive comparison of forecasts generated by the XGBoost and ANN algorithm, along with determining for which types of time series of the algorithms forecast future values with less error. Moreover, due to the use of simulated artificial time series, it was possible to test each algorithm for various market conditions.