Do Large Datasets or Hybrid Integrated Models Outperform Simple Ones in Predicting Commodity Prices and Foreign Exchange Rates?

Jin Shang and Shigeyuki Hamori
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Jin Shang: Graduate School of Economics, Kobe University, 2-1 Rokkodai, Nada-Ku, Kobe 657-8501, Japan

JRFM, 2023, vol. 16, issue 6, 1-25

Abstract: With the continuous advancement of machine learning and the increasing availability of internet-based information, there is a belief that these approaches and datasets enhance the accuracy of price prediction. However, this study aims to investigate the validity of this claim. The study examines the effectiveness of a large dataset and sophisticated methodologies in forecasting foreign exchange rates (FX) and commodity prices. Specifically, we employ sentiment analysis to construct a robust sentiment index and explore whether combining sentiment analysis with machine learning surpasses the performance of a large dataset when predicting FX and commodity prices. Additionally, we apply machine learning methodologies such as random forest (RF), eXtreme gradient boosting (XGB), and long short-term memory (LSTM), alongside the classical statistical model autoregressive integrated moving average (ARIMA), to forecast these prices and compare the models’ performance. Based on the results, we propose novel methodologies that integrate wavelet transformation with classical ARIMA and machine learning techniques (seasonal-decomposition-ARIMA-LSTM, wavelet-ARIMA-LSTM, wavelet-ARIMA-RF, wavelet-ARIMA-XGB). We apply this analysis procedure to the commodity gold futures prices and the euro foreign exchange rates against the US dollar.

Keywords: hybrid forecasting approaches; two-step forecasting approaches; gold; euro; sentiment analysis; machine learning; ARIMA; wavelet transformation; seasonal decomposition; long short-term memory; random forest; eXtreme gradient boosting (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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