Forecasting volatility index by temporal convolutional neural network

Forecasting volatility is essential to avoiding the risk caused by the uncertainties of an financial asset. Complicated financial volatility features such as ambiguity between non-stationarity and stationarity, asymmetry, long-memory, sudden fairly large values like outliers bring great challenges to volatility forecasts. In order to address such complicated features implicity, we consider machine leaning models such as LSTM (1997) and GRU (2014), which are known to be suitable for existing time series forecasting. However, there are the problems of vanishing gradients, of enormous amount of computation, and of a huge memory. To solve these problems, a causal temporal convolutional network (TCN) model, an advanced form of 1D CNN, is also applied. It is confirmed that the overall forecasting power of TCN model is higher than that of the RNN models in forecasting VIX, VXD, and VXN, the daily volatility indices of S&P 500, DJIA, Nasdaq, respectively.