An adaptive volatility method for probabilistic forecasting and its application to the M6 financial forecasting competition

Paper: arXiv 2303.01855

Authors: Joseph de Vilmarest, Nicklas Werge

Abstract

In this paper, we address the problem of probabilistic forecasting using an adaptive volatility method rooted in classical time-varying volatility models and leveraging online stochastic optimization algorithms. These principles were successfully applied in the M6 forecasting competition under the team named AdaGaussMC. Our approach takes a unique path by embracing the Efficient Market Hypothesis (EMH) instead of trying to beat the market directly. We focus on evaluating the efficient market, emphasizing the importance of online forecasting in adapting to the dynamic nature of financial markets. The three key points of our approach are: (a) apply the univariate time-varying volatility model AdaVol, (b) obtain probabilistic forecasts of future returns, and (c) optimize the competition metrics using stochastic gradient-based algorithms. We contend that the simplicity of our approach contributes to its robustness and consistency. Remarkably, our performance in the M6 competition resulted in an overall 7th ranking, with a noteworthy 5th position in the forecasting task. This achievement, considering the perceived simplicity of our approach, underscores the efficacy of our adaptive volatility method in the realm of probabilistic forecasting.

Complexity vs Empirical Score

• Math Complexity: 5.5/10
• Empirical Rigor: 8.0/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper presents a solid empirical validation of a simple yet effective adaptive volatility approach tested directly in the prestigious M6 competition. It balances accessible time-series mathematics with high empirical rigor and practical implementation details, yielding strong competitive results.

Research Flowchart

  flowchart TD
    A[Goal: Dynamic Probabilistic Forecasting under EMH] --> B[Input: M6 Competition Financial Return Data]
    B --> C[Apply AdaVol Univariate Volatility Model]
    C --> D[Generate Probabilistic Forecasts via Online Stochastic Optimization]
    D --> E[Optimize Competition Metrics using Stochastic Gradients]
    E --> F[Outcome: Robust 5th Rank in Forecasting & 7th Overall in M6]