<abstract xmlns="http://www.w3.org/1999/xhtml"><p> Traditionally, the volatility of daily returns in financial markets is modeled autoregressively using a time-series of lagged information. These autoregressive models exploit stylised empirical properties of volatility such as strong persistence, mean reversion and asymmetric dependence on lagged returns. While these methods can produce good forecasts, the approach is in essence atheoretical as it provides no insight into the nature of the causal factors and how they affect volatility. Many plausible explanatory variables relating market conditions and volatility have been identified in various studies but despite the volume of research, we lack a clear theoretical framework that links these factors together. This setting of a theory-weak environment suggests a useful role for powerful model induction methodologies such as Genetic Programming (GP). This study forecasts one-day ahead realised volatility (RV) using a GP methodology that incorporates information on market conditions including trading volume, number of transactions, bid-ask spread, average trading duration (waiting time between trades) and implied volatility. The forecasting performance from the evolved GP models is found to be significantly better than those numbers of benchmark forecasting models drawn from the finance literature, namely, the heterogeneous autoregressive (HAR) model, the generalized autoregressive conditional heteroscedasticity (GARCH) model, and a stepwise linear regression model (SR). Given the practical importance of improved forecasting performance for realised volatility this result is of significance for practitioners in financial markets.</p></abstract>

Traditionally, the volatility of daily returns in financial markets is modeled autoregressively using a time-series of lagged information. These autoregressive models exploit stylised empirical properties of volatility such as strong persistence, mean reversion and asymmetric dependence on lagged returns. While these methods can produce good forecasts, the approach is in essence atheoretical as it provides no insight into the nature of the causal factors and how they affect volatility. Many plausible explanatory variables relating market conditions and volatility have been identified in various studies but despite the volume of research, we lack a clear theoretical framework that links these factors together. This setting of a theory-weak environment suggests a useful role for powerful model induction methodologies such as Genetic Programming (GP). This study forecasts one-day ahead realised volatility (RV) using a GP methodology that incorporates information on market conditions including trading volume, number of transactions, bid-ask spread, average trading duration (waiting time between trades) and implied volatility. The forecasting performance from the evolved GP models is found to be significantly better than those numbers of benchmark forecasting models drawn from the finance literature, namely, the heterogeneous autoregressive (HAR) model, the generalized autoregressive conditional heteroscedasticity (GARCH) model, and a stepwise linear regression model (SR). Given the practical importance of improved forecasting performance for realised volatility this result is of significance for practitioners in financial markets.

An Analysis of the Performance of Genetic Programming for Realised Volatility Forecasting

School of Business, University College Dublin, Ireland

Journal of Artificial Intelligence and Soft Computing Research

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Traditionally, the volatility of daily returns in financial markets is modeled autoregressively using a time-series of lagged information. These autoregressive...

An Analysis of the Performance of Genetic Programming for Realised Volatility Forecasting

Data publikacji: 10 cze 2016

Zakres stron: 155 - 172

DOI: https://doi.org/10.1515/jaiscr-2016-0012

Słowa kluczowe
Realised Volatility, Genetic Programming, High Frequency Data

© 2016

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

An Analysis of the Performance of Genetic Programming for Realised Volatility Forecasting

Data publikacji: 10 cze 2016

Zakres stron: 155 - 172

DOI: https://doi.org/10.1515/jaiscr-2016-0012

Słowa kluczoweRealised Volatility, Genetic Programming, High Frequency Data

© 2016

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Słowa kluczowe
Realised Volatility, Genetic Programming, High Frequency Data