Volatility forecasting using deep neural network with time-series feature embedding

Wei-Jie Chen, Jing-Jing Yao and Yuan-Hai Shao

Economic Research-Ekonomska Istraživanja, 2023, vol. 36, issue 1, 1377-1401

Abstract: Volatility is usually a proxy indicator for market variation or tendency, containing essential information for investors and policy-makers. This paper proposes a novel hybrid deep neural network model (HDNN) with temporal embedding for volatility forecasting. The main idea of our HDNN is that it encodes one-dimensional time-series data as two-dimensional GAF images, which enables the follow-up convolution neural network (CNN) to learn volatility-related feature mappings automatically. Specifically, HDNN adopts an elegant end-to-end learning paradigm for volatility forecasting, which consists of feature embedding and regression components. The feature embedding component explores the volatility-related temporal information from GAF images via the elaborate CNN in an underlying temporal embedding space. Then, the regression component takes these embedding vectors as input for volatility forecasting tasks. Finally, we examine the feasibility of HDNN on four synthetic GBM datasets and five real-world Stock Index datasets in terms of five regression metrics. The results demonstrate that HDNN has better performance in most cases than the baseline forecasting models of GARCH, EGACH, SVR, and NN. It confirms that the volatility-related temporal features extracted by HDNN indeed improve the forecasting ability. Furthermore, the Friedman test verifies that HDNN is statistically superior to the compared forecasting models.

Date: 2023
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DOI: 10.1080/1331677X.2022.2089192

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