Novel optimization approach for realized volatility forecast of stock price index based on deep reinforcement learning model

• Published in: Expert systems with applications 2023-12, Vol.233, p.120880, Article 120880
• Main Authors: Yu, Yuanyuan, Lin, Yu, Hou, Xianping, Zhang, Xi
• Format: Article
• Language: English
• Subjects: Deep neural network; Modified Diebold and Mariano test; Q-learning algorithm; Variational mode decomposition; Volatility forecasting
• ISSN: 0957-4174; 1873-6793
• DOI: 10.1016/j.eswa.2023.120880

Accurately predicting volatility has always been the focus of government decision-making departments, financial regulators and academia. Therefore, it is very crucial to precisely predict the realized volatility (RV) of the stock price index. In this paper, we take the RV sequences of Shanghai Stock Exchange Composite Index (SSEC), Standard & Poor 500 index (SPX) and Financial Times Stock Exchange Index (FTSE) as the research objects, and propose a predictive model based on optimized variational mode decomposition (VMD), deep learning models including deep belief network (DBN), long short-term memory network (LSTM) and gated recurrent unit (GRU), and reinforcement learning Q-learning algorithm. Firstly, the original RV sequence is decomposed by using the VMD ideal parameters optimized by grey wolf optimizer (GWO) to obtain the intrinsic mode functions (IMFs). Then, DBN, LSTM and GRU are used to predict same IMF simultaneously. Finally, the optimal weights of the above three models are determined by the Q-learning algorithm to construct an integrated model, and the final results are obtained after accumulating the predicted values of each IMF. The predictive performance of the model was evaluated by four loss functions: the mean average error (MAE), mean squared error (MSE), heterogeneous mean average error (HMAE), heterogeneous mean squared error (HMSE) and modified Diebold and Mariano test (MDM). The experimental results show that the constructed GVMD-Q-DBN-LSTM-GRU method has better performance that the comparison model in both emerging and developed markets.