Nonlinear Combination of Financial Forecast with Genetic Algorithm

Alper Ozun () and Atilla Cifter ()

MPRA Paper from University Library of Munich, Germany

Abstract: Complexity in the financial markets requires intelligent forecasting models for return volatility. In this paper, historical simulation, GARCH, GARCH with skewed student-t distribution and asymmetric normal mixture GRJ-GARCH models are combined with Extreme Value Theory Hill by using artificial neural networks with genetic algorithm as the combination platform. By employing daily closing values of the Istanbul Stock Exchange from 01/10/1996 to 11/07/2006, Kupiec and Christoffersen tests as the back-testing mechanisms are performed for forecast comparison of the models. Empirical findings show that the fat-tails are more properly captured by the combination of GARCH with skewed student-t distribution and Extreme Value Theory Hill. Modeling return volatility in the emerging markets needs “intelligent” combinations of Value-at-Risk models to capture the extreme movements in the markets rather than individual model forecast.

Keywords: Forecast combination; Artificial neural networks; GARCH models; Extreme value theory; Christoffersen test (search for similar items in EconPapers)
JEL-codes: G0 C52 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-ecm, nep-ets, nep-for and nep-rmg
Date: 2007-02-01
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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:2488

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