Futures volatility forecasting based on big data analytics with incorporating an order imbalance effect

Shusheng Ding, Tianxiang Cui, Yongmin Zhang

Research output: Journal PublicationArticlepeer-review

Abstract

Future markets play vital roles in supporting economic activities in modern society. For example, crude oil and electricity futures markets have heavy effects on a nation's energy operation management. Thus, volatility forecasting of the futures market is an emerging but increasingly influential field of financial research. In this paper, we adopt big data analytics, called Extreme Gradient Boosting (XGBoost) from computer science, in an attempt to improve the forecasting accuracy of futures volatility and to demonstrate the application of big data analytics in the financial spectrum in terms of volatility forecasting. We further unveil that order imbalance estimation might incorporate abundant information to reflect price jumps and other trading information in the futures market. Including order imbalance information helps our model capture underpinned market rules such as supply and demand, which lightens the information loss during the model formation. Our empirical results suggest that the volatility forecasting accuracy of the XGBoost method considerably beats the GARCH-jump and HAR-jump models in both crude oil futures market and electricity futures market. Our results could also produce plentiful research implications for both policy makers and energy futures market participants.

Original languageEnglish
Article number102255
JournalInternational Review of Financial Analysis
Volume83
DOIs
Publication statusPublished - Oct 2022

Keywords

  • Big data analytics
  • Crude oil futures market volatility
  • Electricity market volatility
  • Order imbalance

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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