Author(s)

Altaf Hossain, Mohammed Nasser

.

In the recent years, the use of GARCH type (especially, ARMA-GARCH) models and computational-intelligence-based techniques—Support Vector Machine (SVM) and Relevance Vector Machine (RVM) have been successfully used for financial forecasting. This paper deals with the application of ARMA-GARCH, recurrent SVM (RSVM) and recurrent RVM (RRVM) in volatility forecasting. Based on RSVM and RRVM, two GARCH methods are used and are compared with parametric GARCHs (Pure and ARMA-GARCH) in terms of their ability to forecast multi-periodically. These models are evaluated on four performance metrics: MSE, MAE, DS, and linear regression R squared. The real data in this study uses two Asian stock market composite indices of BSE SENSEX and NIKKEI225. This paper also examines the effects of outliers on modeling and forecasting volatility. Our experiment shows that both the RSVM and RRVM perform almost equally, but better than the GARCH type models in forecasting. The ARMA-GARCH model is superior to the pure GARCH and only the RRVM with RSVM hold the robustness properties in forecasting.

RSVM, RRVM, ARMA-GARCH, Outliers, Volatility Forecasting

A. Hossain and M. Nasser, "Recurrent Support and Relevance Vector Machines Based Model with Application to Forecasting Volatility of Financial Returns," Journal of Intelligent Learning Systems and Applications, Vol. 3 No. 4, 2011, pp. 230-241. doi: 10.4236/jilsa.2011.34026.