Forecasting and modelling the VIX using Neural Networks

Netshivhambe, Nomonde

Forecasting and modelling the VIX using Neural Networks

Master Thesis

2022

Abstract

This study investigates the volatility forecasting ability of neural network models. In particular, we focus on the performance of Multi-layer Perceptron (MLP) and the Long Short Term (LSTM) Neural Networks in predicting the CBOE Volatility Index (VIX). The inputs into these models includes the VIX, GARCH(1,1) fitted values and various financial and macroeconomic explanatory variables, such as the S&P 500 returns and oil price. In addition, this study segments data into two sub-periods, namely a Calm and Crisis Period in the financial market. The segmentation of the periods caters for the changes in the predictive power of the aforementioned models, given the dierent market conditions. When forecasting the VIX, we show that the best performing model is found in the Calm Period. In addition, we show that the MLP has more predictive power than the LSTM.

Keywords

Data Science

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