Foundation Time-Series AI Model for Realized Volatility Forecasting

ArXiv ID: 2505.11163 “View on arXiv”

Authors: Anubha Goel, Puneet Pasricha, Martin Magris, Juho Kanniainen

Abstract

Time series foundation models (FMs) have emerged as a popular paradigm for zero-shot multi-domain forecasting. These models are trained on numerous diverse datasets and claim to be effective forecasters across multiple different time series domains, including financial data. In this study, we evaluate the effectiveness of FMs, specifically the TimesFM model, for volatility forecasting, a core task in financial risk management. We first evaluate TimesFM in its pretrained (zero-shot) form, followed by our custom fine-tuning procedure based on incremental learning, and compare the resulting models against standard econometric benchmarks. While the pretrained model provides a reasonable baseline, our findings show that incremental fine-tuning, which allows the model to adapt to new financial return data over time, is essential for learning volatility patterns effectively. Fine-tuned variants not only improve forecast accuracy but also statistically outperform traditional models, as demonstrated through Diebold-Mariano and Giacomini-White tests. These results highlight the potential of foundation models as scalable and adaptive tools for financial forecasting-capable of delivering strong performance in dynamic market environments when paired with targeted fine-tuning strategies.

Keywords: time series foundation models, volatility forecasting, incremental learning, risk management, Diebold-Mariano test, Equities

Complexity vs Empirical Score

• Math Complexity: 5.0/10
• Empirical Rigor: 8.0/10
• Quadrant: Holy Grail
• Why: The paper applies advanced deep learning techniques (transformer architecture, incremental learning) but primarily focuses on empirical evaluation, statistical tests, and extensive backtesting across 21 global indices.

  flowchart TD
    A["Research Goal:<br>Evaluate TimesFM for Volatility Forecasting"] --> B["Data: S&P 500 & NASDAQ<br>Realized Volatility Series"]
    B --> C["Methodology: Three-Stage Approach"]
    
    C --> D["1. Zero-Shot<br>Pretrained TimesFM"]
    C --> E["2. Fine-Tuned<br>Incremental Learning"]
    C --> F["3. Baseline<br>Standard Econometrics"]
    
    D --> G["Testing & Comparison"]
    E --> G
    F --> G
    
    G --> H{"Evaluation"}
    H --> I["Forecast Accuracy<br>vs Benchmarks"]
    H --> J["Statistical Tests<br>DM & GW"]
    
    I --> K["Key Findings"]
    J --> K
    
    K --> L["• Incremental Fine-Tuning Essential"]
    K --> M["• Outperforms Econometrics"]
    K --> N["• Scalable for Financial Risk"]
    
    style A fill:#e1f5fe
    style B fill:#fff3e0
    style C fill:#f3e5f5
    style K fill:#e8f5e8