Estimating Volatility of Saudi Stock Market Using Hybrid Dynamic Evolving Neural Fuzzy Inference System Models

Nawaf N. Hamadneh (), Jamil J. Jaber and Saratha Sathasivam
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Nawaf N. Hamadneh: Department of Basic Sciences, College of Science and Theoretical Studies, Saudi Electronic University, Riyadh 11673, Saudi Arabia
Jamil J. Jaber: Department of Finance and Banking, Faculty of Business, Applied Science Private University, Amman 11937, Jordan
Saratha Sathasivam: School of Mathematical Sciences, Universiti Sains Malaysia, USM, Gelugor 11800, Penang, Malaysia

JRFM, 2024, vol. 17, issue 8, 1-22

Abstract: This paper examines the volatility risk in the KSA stock market (Tadawul), with a specific focus on predicting volatility using the logarithm of the standard deviation of stock market prices (LSCP) as the output variable. To enhance volatility prediction, it proposes the combined use of the dynamic evolving neural fuzzy inference system (DENFIS) and the nonlinear spectral model, maximum overlapping discrete wavelet transform (MODWT). This study utilizes a dataset comprising 4609 observations and investigates the inputs of lag 1 of the close stock price (LCP), the natural logarithm of oil price (Loil), the natural logarithm of cost of living (LCL), and the interbank rate (IB), determined through autocorrelation (AC), partial autocorrelation (PAC), correlation, and Granger causality tests. Regression analysis reveals significant effects of variables on LSCP: LCP has a negative effect, and Loil has a positive effect in the ordinary least square (OLS) model, while LCL and IB have positive effects in the fixed effect model and negative effects in the random effect model. The MODWT-Haar-DENFIS model was developed as we found that the model has the potential to be an effective model for stock market forecasting. The results provide valuable insights for investors and policymakers, aiding in risk management, investment decisions, and the development of measures to mitigate stock market volatility.

Keywords: volatility; oil prices; cost of living; wavelet transform; DENFIS models (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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