GARCH-FIS: A Hybrid Forecasting Model with Dynamic Volatility-Driven Parameter Adaptation
Organizations: School of Science, University of Science and Technology Liaoning, Anshan, Liaoning Province, 114051, PR China
Abstract
This paper proposes a novel hybrid model, termed GARCH-FIS, for recursive rolling multi-step forecasting of financial time series. It integrates a Fuzzy Inference System (FIS) with a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to jointly address nonlinear dynamics and time-varying volatility. The core innovation is a dynamic parameter adaptation mechanism for the FIS, specifically activated within the multi-step forecasting cycle. In this process, the conditional volatility estimated by a rolling window GARCH model is continuously translated into a price volatility measure. At each forecasting step, this measure, alongside the updated mean of the sliding window data -- which now incorporates the most recent predicted price -- jointly determines the parameters of the FIS membership functions for the next prediction. Consequently, the granularity of the fuzzy inference adapts as the forecast horizon extends: membership functions are automatically widened during high-volatility market regimes to bolster robustness and narrowed during stable periods to enhance precision. This constitutes a fundamental advancement over a static one-step-ahead prediction setup. Furthermore, the model's fuzzy rule base is automatically constructed from data using the Wang-Mendel method, promoting interpretability and adaptability. Empirical evaluation, focused exclusively on multi-step forecasting performance across ten diverse financial assets, demonstrates that the proposed GARCH-FIS model significantly outperforms benchmark models -- including Support Vector Regression(SVR), Long Short-Term Memory networks(LSTM), and an ARIMA-GARCH econometric model -- in terms of predictive accuracy and stability, while effectively mitigating error accumulation in extended recursive forecasts.
Figures & tables
| Financial product data | LSTM | SVR | ARIMA-GARCH | GARCH-FIS |
|---|---|---|---|---|
| CSI 300 Index | 0.319 | -0.653 | -0.575 | 0.812 |
| NASDAQ Composite Index | 0.064 | -1.105 | -0.402 | 0.965 |
| SSE Composite Index | -0.765 | -0.108 | -0.025 | 0.743 |
| S&P500 Index | 0.454 | -1.400 | -1.576 | 0.973 |
| GCQ5 | 0.159 | -1.304 | -1.592 | 0.965 |
| 0P000090LF | -0.151 | 0.261 | -0.111 | 0.893 |
Time Series Forecasting
Time series forecasting predicts future values from ordered observations using statistical, neural, and probabilistic models to support decisions under uncertainty.
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