Forecasting Forex Market Volatility Using Deep Learning Models and Complexity Measures

Pavlos I. Zitis, Stelios M. Potirakis () and Alex Alexandridis
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Pavlos I. Zitis: Department of Electrical and Electronics Engineering, University of West Attica, Ancient Olive Grove Campus, Egaleo, 12241 Athens, Greece
Stelios M. Potirakis: Department of Electrical and Electronics Engineering, University of West Attica, Ancient Olive Grove Campus, Egaleo, 12241 Athens, Greece
Alex Alexandridis: Department of Electrical and Electronics Engineering, University of West Attica, Ancient Olive Grove Campus, Egaleo, 12241 Athens, Greece

JRFM, 2024, vol. 17, issue 12, 1-22

Abstract: In this article, we examine whether incorporating complexity measures as features in deep learning (DL) algorithms enhances their accuracy in predicting forex market volatility. Our approach involved the gradual integration of complexity measures alongside traditional features to determine whether their inclusion would provide additional information that improved the model’s predictive accuracy. For our analyses, we employed recurrent neural networks (RNNs), long short-term memory (LSTM), and gated recurrent units (GRUs) as DL model architectures, while using the Hurst exponent and fuzzy entropy as complexity measures. All analyses were conducted on intraday data from four highly liquid currency pairs, with volatility estimated using the Range-Based estimator. Our findings indicated that the inclusion of complexity measures as features significantly enhanced the accuracy of DL models in predicting volatility. In achieving this, we contribute to a relatively unexplored area of research, as this is the first instance of such an approach being applied to the prediction of forex market volatility. Additionally, we conducted a comparative analysis of the three models’ performance, revealing that the LSTM and GRU models consistently demonstrated a superior accuracy. Finally, our findings also have practical implications, as they may assist risk managers and policymakers in forecasting volatility in the forex market.

Keywords: deep learning algorithms; complexity measures; recurrent neural networks; long short-term memory; gated recurrent units; hurst exponent; fuzzy entropy; econophysics; forex market; volatility (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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