Bias effect on predicting market trends with EMD

Financial time series are notoriously difficult to analyze and predict, given their non-stationary, highly oscillatory nature. In this study, we evaluate the effectiveness of the Ensemble Empirical Mode Decomposition (EEMD), the ensemble version of Empirical Mode Decomposition (EMD), at generating a representation for market indexes that improves trend prediction. Our results suggest that the promising results reported using EEMD on financial time series were obtained by inadvertently adding look-ahead bias to the testing protocol via pre-processing the entire series with EMD, which affects predictive results. In contrast to conclusions found in the literature, our results indicate that the application of EMD and EEMD with the objective of generating a better representation for financial time series is not sufficient to improve the accuracy or cumulative return obtained by the models used in this study.