Volatility forecasts of stock index futures in China and the US–A hybrid LSTM approach

Xue Chen and Yan Hu

PLOS ONE, 2022, vol. 17, issue 7, 1-17

Abstract: This paper is concerned with the unsolved issue of how to accurately predict the financial market volatility. We propose a novel volatility prediction method for stock index futures prediction based on LSTM, PCA, stock indices and relevant futures. Inspired by the recent advancement of deep learning methodology, six models that combine a variety of artificial intelligence techniques are compared, including ANN, ANN(PCA), ANN(AE), LSTM, LSTM(PCA), and LSTM(AE). That is, in the design and comparison of the proposed AI models, we consider the combination of two dimensionality reduction methods (PCA and AE) and two typical neural networks (ANN and LSTM) in processing time series data. Besides, to further assess the prediction performance of the proposed models, two widely-applied statistical models (i.e. AR and EGARCH) on volatility prediction are used as benchmarks. In the empirical study, we collect financial trading data in both China and the US, and compare the performances of different models in predicting 5 days and 10 days ahead volatilities of stock index futures. In all, our analysis supports the use of LSTM(PCA) model to tackle those irregular and complex datasets.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0271595

DOI: 10.1371/journal.pone.0271595

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