Introducing the $\sigma$-Cell: Unifying GARCH, Stochastic Fluctuations and Evolving Mechanisms in RNN-based Volatility Forecasting

German Rodikov and Nino Antulov-Fantulin

Papers from arXiv.org

Abstract: This paper introduces the $\sigma$-Cell, a novel Recurrent Neural Network (RNN) architecture for financial volatility modeling. Bridging traditional econometric approaches like GARCH with deep learning, the $\sigma$-Cell incorporates stochastic layers and time-varying parameters to capture dynamic volatility patterns. Our model serves as a generative network, approximating the conditional distribution of latent variables. We employ a log-likelihood-based loss function and a specialized activation function to enhance performance. Experimental results demonstrate superior forecasting accuracy compared to traditional GARCH and Stochastic Volatility models, making the next step in integrating domain knowledge with neural networks.

Date: 2023-09
New Economics Papers: this item is included in nep-big, nep-cmp, nep-ecm and nep-ets
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