The application of artificial neural networks to finance has received a great deal of attention from both investors and researchers, especially as a forecasting method. When the number of predictors is high, these methods suffer from the so-called “curse of dimensionality” and produce biased forecasts. We relied on dimensionality reduction methods to alleviate such issue when a wide set of financial and macroeconomic variables is considered in the prediction of stock market volatility. Specifically, we combined Bayesian Model Averaging (BMA), Principal Component Analysis (PCA), Non-negative Matrix Factorization (NMF) and Least Absolute Shrinkage and Selection Operator (LASSO) with hybrid artificial neural networks to forecast realized volatility. The results showed that reduced models could perform similarly or even outperform the full models in predictive accuracy.

Combining dimensionality reduction with neural networks for realized volatility forecasting

A. Bucci
Primo
;
2021-01-01

Abstract

The application of artificial neural networks to finance has received a great deal of attention from both investors and researchers, especially as a forecasting method. When the number of predictors is high, these methods suffer from the so-called “curse of dimensionality” and produce biased forecasts. We relied on dimensionality reduction methods to alleviate such issue when a wide set of financial and macroeconomic variables is considered in the prediction of stock market volatility. Specifically, we combined Bayesian Model Averaging (BMA), Principal Component Analysis (PCA), Non-negative Matrix Factorization (NMF) and Least Absolute Shrinkage and Selection Operator (LASSO) with hybrid artificial neural networks to forecast realized volatility. The results showed that reduced models could perform similarly or even outperform the full models in predictive accuracy.
978-9925-7812-0-1
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11564/754202
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