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May/June 2002, 
Vol. 84, No. 3
Posted 2002-05-01

Predicting Exchange Rate Volatility: Genetic Programming Versus GARCH and RiskMetrics(TM)

by Christopher J. Neely and Paul A. Weller

This article investigates the use of genetic programming to forecast out-of-sample daily volatility in the foreign exchange market. Forecasting performance is evaluated relative to GARCH(1, 1) and RiskMetricsTM models for two currencies, the Deutsche mark and the Japanese yen. Although the GARCH and RiskMetricsTM models appear to have an inconsistent marginal edge over the genetic program using the mean-squared-error (MSE) R2 criteria, the genetic program consistently produces lower mean absolute forecast errors (MAE) at all horizons and for both currencies.





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