A Machine Learning Approach to Volatility Forecasting*

Kim Christensen, Mathias Siggaard and Bezirgen Veliyev

Journal of Financial Econometrics, 2023, vol. 21, issue 5, 1680-1727

Abstract: We inspect how accurate machine learning (ML) is at forecasting realized variance of the Dow Jones Industrial Average index constituents. We compare several ML algorithms, including regularization, regression trees, and neural networks, to multiple heterogeneous autoregressive (HAR) models. ML is implemented with minimal hyperparameter tuning. In spite of this, ML is competitive and beats the HAR lineage, even when the only predictors are the daily, weekly, and monthly lags of realized variance. The forecast gains are more pronounced at longer horizons. We attribute this to higher persistence in the ML models, which helps to approximate the long memory of realized variance. ML also excels at locating incremental information about future volatility from additional predictors. Lastly, we propose an ML measure of variable importance based on accumulated local effects. This shows that while there is agreement about the most important predictors, there is disagreement on their ranking, helping to reconcile our results.

Keywords: accumulated local effect; heterogeneous auto-regression; machine learning; realized variance; volatility forecasting (search for similar items in EconPapers)
JEL-codes: C10 C50 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (7)

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Working Paper: A machine learning approach to volatility forecasting (2021)
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