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Deep Learning Stock Volatility with Google Domestic Trends

Author

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  • Ruoxuan Xiong
  • Eric P. Nichols
  • Yuan Shen

Abstract

We have applied a Long Short-Term Memory neural network to model S&P 500 volatility, incorporating Google domestic trends as indicators of the public mood and macroeconomic factors. In a held-out test set, our Long Short-Term Memory model gives a mean absolute percentage error of 24.2%, outperforming linear Ridge/Lasso and autoregressive GARCH benchmarks by at least 31%. This evaluation is based on an optimal observation and normalization scheme which maximizes the mutual information between domestic trends and daily volatility in the training set. Our preliminary investigation shows strong promise for better predicting stock behavior via deep learning and neural network models.

Suggested Citation

  • Ruoxuan Xiong & Eric P. Nichols & Yuan Shen, 2015. "Deep Learning Stock Volatility with Google Domestic Trends," Papers 1512.04916, arXiv.org, revised Feb 2016.
    • Handle: RePEc:arx:papers:1512.04916
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    References listed on IDEAS

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    1. repec:bla:jfinan:v:59:y:2004:i:2:p:755-793 is not listed on IDEAS
    2. Garman, Mark B & Klass, Michael J, 1980. "On the Estimation of Security Price Volatilities from Historical Data," The Journal of Business, University of Chicago Press, vol. 53(1), pages 67-78, January.
    3. Hamid, Shaikh A. & Iqbal, Zahid, 2004. "Using neural networks for forecasting volatility of S&P 500 Index futures prices," Journal of Business Research, Elsevier, vol. 57(10), pages 1116-1125, October.
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    Cited by:

    1. Andrea Bucci, 2020. "Realized Volatility Forecasting with Neural Networks," Journal of Financial Econometrics, Oxford University Press, vol. 18(3), pages 502-531.
    2. Kim, A. & Yang, Y. & Lessmann, S. & Ma, T. & Sung, M.-C. & Johnson, J.E.V., 2020. "Can deep learning predict risky retail investors? A case study in financial risk behavior forecasting," European Journal of Operational Research, Elsevier, vol. 283(1), pages 217-234.
    3. Yuping Song & Xiaolong Tang & Hemin Wang & Zhiren Ma, 2023. "Volatility forecasting for stock market incorporating macroeconomic variables based on GARCH‐MIDAS and deep learning models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(1), pages 51-59, January.
    4. Andrea Bucci, 2020. "Cholesky–ANN models for predicting multivariate realized volatility," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(6), pages 865-876, September.
    5. Milan Cibuľa & Michal Tkáč, 2023. "Porovnanie algoritmov strojového učenia pre tvorbu predikčného modelu ceny bitcoinu [Comparison of Machine Learning Algorithms for Creation of a Bitcoin Price Prediction Model]," Politická ekonomie, Prague University of Economics and Business, vol. 2023(5), pages 496-517.
    6. Lucien Boulet, 2021. "Forecasting High-Dimensional Covariance Matrices of Asset Returns with Hybrid GARCH-LSTMs," Papers 2109.01044, arXiv.org.
    7. Milan Cibuľa & Michal Tkáč, . "Porovnanie algoritmov strojového učenia pre tvorbu predikčného modelu ceny bitcoinu [Comparison of Machine Learning Algorithms for Creation of a Bitcoin Price Prediction Model]," Politická ekonomie, Prague University of Economics and Business, vol. 0.
    8. Chao Liu & Fengfeng Gao & Mengwan Zhang & Yuanrui Li & Cun Qian, 2024. "Reference Vector-Based Multiobjective Clustering Ensemble Approach for Time Series Forecasting," Computational Economics, Springer;Society for Computational Economics, vol. 64(1), pages 181-210, July.
    9. Shujian Liao & Jian Chen & Hao Ni, 2021. "Forex Trading Volatility Prediction using Neural Network Models," Papers 2112.01166, arXiv.org, revised Dec 2021.
    10. Zhengyong Jiang & Jeyan Thiayagalingam & Jionglong Su & Jinjun Liang, 2023. "CAD: Clustering And Deep Reinforcement Learning Based Multi-Period Portfolio Management Strategy," Papers 2310.01319, arXiv.org.
    11. Yuping Song & Bolin Lei & Xiaolong Tang & Chen Li, 2024. "Volatility forecasting for stock market index based on complex network and hybrid deep learning model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(3), pages 544-566, April.
    12. Nikita Medvedev & Zhiguang Wang, 2022. "Multistep forecast of the implied volatility surface using deep learning," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(4), pages 645-667, April.
    13. Theodoros Zafeiriou & Dimitris Kalles, 2024. "Comparative analysis of neural network architectures for short-term FOREX forecasting," Papers 2405.08045, arXiv.org.
    14. Manuel Nunes & Enrico Gerding & Frank McGroarty & Mahesan Niranjan, 2020. "Long short-term memory networks and laglasso for bond yield forecasting: Peeping inside the black box," Papers 2005.02217, arXiv.org.

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