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Forecasting Forex Market Volatility Using Deep Learning Models and Complexity Measures

Author

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  • Pavlos I. Zitis

    (Department of Electrical and Electronics Engineering, University of West Attica, Ancient Olive Grove Campus, Egaleo, 12241 Athens, Greece)

  • Stelios M. Potirakis

    (Department of Electrical and Electronics Engineering, University of West Attica, Ancient Olive Grove Campus, Egaleo, 12241 Athens, Greece
    National Observatory of Athens, Metaxa and Vasileos Pavlou, Institute for Astronomy, Astrophysics, Space Applications and Remote Sensing, Penteli, 15236 Athens, Greece)

  • Alex Alexandridis

    (Department of Electrical and Electronics Engineering, University of West Attica, Ancient Olive Grove Campus, Egaleo, 12241 Athens, Greece)

Abstract

In this article, we examine whether incorporating complexity measures as features in deep learning (DL) algorithms enhances their accuracy in predicting forex market volatility. Our approach involved the gradual integration of complexity measures alongside traditional features to determine whether their inclusion would provide additional information that improved the model’s predictive accuracy. For our analyses, we employed recurrent neural networks (RNNs), long short-term memory (LSTM), and gated recurrent units (GRUs) as DL model architectures, while using the Hurst exponent and fuzzy entropy as complexity measures. All analyses were conducted on intraday data from four highly liquid currency pairs, with volatility estimated using the Range-Based estimator. Our findings indicated that the inclusion of complexity measures as features significantly enhanced the accuracy of DL models in predicting volatility. In achieving this, we contribute to a relatively unexplored area of research, as this is the first instance of such an approach being applied to the prediction of forex market volatility. Additionally, we conducted a comparative analysis of the three models’ performance, revealing that the LSTM and GRU models consistently demonstrated a superior accuracy. Finally, our findings also have practical implications, as they may assist risk managers and policymakers in forecasting volatility in the forex market.

Suggested Citation

  • Pavlos I. Zitis & Stelios M. Potirakis & Alex Alexandridis, 2024. "Forecasting Forex Market Volatility Using Deep Learning Models and Complexity Measures," JRFM, MDPI, vol. 17(12), pages 1-22, December.
  • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:12:p:557-:d:1542974
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    References listed on IDEAS

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    1. Chen, Cathy W.S. & Gerlach, Richard & Lin, Edward M.H., 2008. "Volatility forecasting using threshold heteroskedastic models of the intra-day range," Computational Statistics & Data Analysis, Elsevier, vol. 52(6), pages 2990-3010, February.
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