Deep Learning and Transformer Architectures for Volatility Forecasting: Evidence from U.S. Equity Indices

Volatility forecasting plays a crucial role in financial markets, portfolio management, and risk control. Classical econometric models such as GARCH, ARIMA, and HAR-RV are widely used but face limitations in capturing the nonlinear and regime-dependent dynamics of financial volatility. This study compares traditional econometric models (HAR-RV, ARIMA, GARCH) with deep learning (DL) architectures (LSTM, CNN-LSTM, PatchTST-lite, and Vanilla Transformer) in forecasting realized variance (RV) for major U.S. equity indices (S&P 500, NASDAQ 100, and the Dow Jones Industrial Average) over the period 2000–2025. RV is used as the dependent variable because it is a standard model-free proxy for market volatility. Forecast accuracy is evaluated across forecast horizons of h = 1, 5, 22 days using QLIKE, RMSE, and MAE, along with Diebold–Mariano (DM) significance tests and overfitting diagnostics. Results show that Transformer-based models achieve the lowest errors and strongest generalization, particularly at short horizons and during volatile periods. Overall, the findings highlight the growing advantage of AI-driven models in delivering stable and economically meaningful volatility forecasts, supporting more effective portfolio allocation and risk management—especially in environments marked by rapid market shifts and structural breaks.

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Publication Details

Journal
Journal of risk and financial management
Published
2025-12-02
DOI
https://doi.org/10.3390/jrfm18120685
Primary Topic
Stock Market Forecasting Methods
Type
article
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article

Deep Learning and Transformer Architectures for Volatility Forecasting: Evidence from U.S. Equity Indices

Journal of risk and financial management
Stock Market Forecasting Methods
article

Deep Learning and Transformer Architectures for Volatility Forecasting: Evidence from U.S. Equity Indices

article en

Abstract

Volatility forecasting plays a crucial role in financial markets, portfolio management, and risk control. Classical econometric models such as GARCH, ARIMA, and HAR-RV are widely used but face limitations in capturing the nonlinear and regime-dependent dynamics of financial volatility. This study compares traditional econometric models (HAR-RV, ARIMA, GARCH) with deep learning (DL) architectures (LSTM, CNN-LSTM, PatchTST-lite, and Vanilla Transformer) in forecasting realized variance (RV) for major U.S. equity indices (S&P 500, NASDAQ 100, and the Dow Jones Industrial Average) over the period 2000–2025. RV is used as the dependent variable because it is a standard model-free proxy for market volatility. Forecast accuracy is evaluated across forecast horizons of h = 1, 5, 22 days using QLIKE, RMSE, and MAE, along with Diebold–Mariano (DM) significance tests and overfitting diagnostics. Results show that Transformer-based models achieve the lowest errors and strongest generalization, particularly at short horizons and during volatile periods. Overall, the findings highlight the growing advantage of AI-driven models in delivering stable and economically meaningful volatility forecasts, supporting more effective portfolio allocation and risk management—especially in environments marked by rapid market shifts and structural breaks.

Journal of risk and financial managementVol. 18(12)
Plovdiv University (BG)
Industry, innovation and infrastructure
Openalex Percentile: Top 34%
Stock Market Forecasting Methods
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Deep Learning and Transformer Architectures for Volatility Forecasting: Evidence from U.S. Equity Indices · Journal of risk and financial management (2025) | TGRS Research Map | TGRS