Text-Enhanced Financial Volatility Prediction with Hawkes LSTM

Volatility is a fundamental indicator for assessing the risk of financial assets. By integrating unstructured data, such as earnings call transcripts, the limitations of traditional time series data can be transcended, enabling collaborative forecasting from multiple data sources, enhancing the robustness of volatility prediction, and improving the efficiency of risk management. Although current research has effectively utilized earnings call data to predict asset volatility, price trends, and stock correlations, it often overlooks the inherent challenges of integrating textual and time series data, as well as the self-exciting and clustering characteristics of financial events. While conventional Long Short-Term Memory (LSTM) networks excel in processing fused data, they lack the structural capacity to explicitly model event-driven temporal decay, often failing to differentiate the varying influence of historical shocks over time. To surmount this limitation, we have significantly enhanced the predictive model by focusing on extracting salient information and integrating temporal dependency modeling with dynamic state adjustment mechanisms. The core innovation is introducing the Hawkes process to explicitly capture the self-exciting effect of financial events, which is the key to modeling volatility clustering around earnings releases. The proposed Hawkes LSTM model introduces a decay gating module and a textual information knowledge enhancement module. The decay gating module is specifically designed to more effectively capture the temporal dependencies between events within an event sequence. This allows the model to focus more on recent significant events, with the influence of an event on subsequent events typically diminishing as the temporal interval between them increases. By integrating temporal dependency modeling, the model is enabled to utilize historical data in a more flexible manner. The dynamic state adjustment mechanism further enhances its capacity to capture dynamically changing characteristics. Together, these features provide a more robust and precise solution for volatility prediction. Experimental results on two real-world earnings call datasets show that this approach significantly outperforms existing benchmark models on most prediction horizons, achieving competitive and superior performance and verifying its effectiveness and robustness.