Modeling Volatility in the Stock Market for Accuracy in Forecasting
Godfrey Joseph Saqware1, Ismail B2
1Godfrey Joseph Saqware, Research Scholar, Department of PG Studies and Research in Statistics, Mangalore University, MangaloreKarnataka, India.
2Ismail B, Professor of Statistics, Department of Statistics, YENEPOYA (Deemed to be University), Mangalore, Karnataka, India.
Manuscript received on January 02, 2020. | Revised Manuscript received on January 15, 2020. | Manuscript published on January 30, 2020. | PP: 41-49 | Volume-8 Issue-5, January 2020. | Retrieval Number: E5608018520/2020©BEIESP | DOI: 10.35940/ijrte.E5608.018520
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© The Authors. Blue Eyes Intelligence Engineering and Sciences Publication (BEIESP). This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Abstract: In this paper, the best GARCH type model was selected and compared with the machine learning models, such as Extreme Learning Machine (ELM) and Multilayer Perceptron Neural Network (MLP-NN) models in modeling and forecasting monthly return of the financial market data. The objective of the study was to compare the best model in forecasting New York and Shanghai Stock Composite indices, for the period 01.01.1996 to 01.09.2019. The GJR-GARCH model outperformed other GARCH type models based on the Schwarz Bayesian Information Criterion (SSBIC). The Monte Carlo simulation carried at 1000, 2000, 3000, 4000 and 5000 finite sample (window) sizes to test the consistency of the GJR-GARCH model parameters has shown perfect results between true and the simulated coefficients. Finally, the GJR-GARCH model was compared with the MLP-NN and ELM machine learning models. The monthly return forecasting of two years (24 months) was done starting from period 01.09.2019 to 01.09.2021. The study found the MLP-NN model as the best in the modeling and forecasting monthly returns of the two composite stock indices for the two years by considering the Root Mean Square Error (RMSE).The study recommends that further research should focus on the formulation of the hybrid model that combines machine learning and the GJR-GARCH models in forecasting stock market volatility.
Keywords: GARCH type models, GJR-GARCH, Extreme Learning Machine (ELM), Multilayer Perceptron Neural Network (MLP-NN), MSE, RMSE.
Scope of the Article: Machine Learning.