Expert Systems with Applications 157 (2020) 113481

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Expert Systems with Applications

journal homepage: www.elsevier.com/locate/eswa

Gold volatility prediction using a CNN-LSTM approach

Andrés Vidal a, Werner Kristjanpoller a,⇑
a
Departamento de Industrias, Universidad Técnica Federico Santa María, Av. España 1680, Valparaíso, Chile

a r t i c l e i n f o a b s t r a c t

Article history: Prediction of volatility for different types of financial assets is one of the tasks of greater mathematical
Received 24 June 2019 complexity in time series prediction, mainly due to its noisy, non-stationary and heteroscedastic struc-
Revised 23 December 2019 ture. On the other hand, gold is an asset of particular importance for hedging and diversification of invest-
Accept 23 April 2020
ment portfolios, and therefore it is important to predict future volatility of this asset. This paper seeks to
Available online 4 May 2020
significantly improve the forecast of gold volatility by combining two deep learning methodologies:
short-term memory networks (LSTM) added to convolutional neural networks (specifically a pre-
Keywords:
trained VGG16 network). It is important to mention that these types of hybrid architectures have not
Gold price volatility
Volatility forecasting
been used in time series prediction, so it is a completely new approach to solving these types of problems.
Deep learning The CNN-LSTM hybrid model is capable of including images as input which provides a wide variety of
CNN information associated with both static and dynamic characteristics of the series. In parallel, different
LSTM lags of profitability of the series are entered as input, which allows it to learn from the temporal structure.
Stock returns forecasting The results show a substantial improvement when this hybrid model is compared to the GARCH and
Hyperparameter setting LSTM models. A 37% reduction in MSE is observed compared to the classic GARCH model, and 18% com-
pared to the LSTM model. Finally, the Model Confidence Model (MCS) determines a significant improve-
ment in the prediction of the hybrid model. The fundamental importance of this research lies in the
application of a new type of architecture capable of processing various sources of information for any
time series prediction task.
Ó 2020 Elsevier Ltd. All rights reserved.

1. Introduction
The prediction of volatility in financial assets has been widely
studied during the last decades, mainly because it is an indicator
that allows deducing the risk associated with said asset in a certain
time window. On the other hand, there are assets known as instru-
ments to balance this volatility in a given investment portfolio, and
gold is widely known to possess this characteristic.
In the current economic scenario, it is imperative to estimate
the volatility of gold, due to its wide use in uncorrelated or negathe
financial market. Some of its applications are mentioned below,
mainly linked to hedging and portfolio diversification.
A hedge is defined as ‘‘an asset that istively correlated with
another asset or portfolio on average” (Baur & Lucey, 2010).
Sumner, Johnson, and Soenen (2010) studied real return and
volatility spillovers between gold, stocks and bonds in the US. They
did not find almost any spillovers in the period analyzed (between
1970 and 2009), which can confirm that gold has diversifying char-
acteristics in the investment portfolio.
⇑ Corresponding author.
E-mail addresses: andres.vidal.12@sansano.usm.cl (A. Vidal), werner.kristjan-
poller@usm.cl (W. Kristjanpoller).
Chua, Sick, and Woodward (1990) state that gold has a low Beta,
according to the CAPM model, and find that its difference of zero is
insignificant for various time periods. This shows that gold price
movements have no correlation with stock price movements on
average over the period examined. This is what gives gold the abil-
ity to hedge portfolio risk.
In Bruno and Chincarini (2010) these authors calculated the
optimally weighted portfolios to assess how much gold investors
in various countries should have in order to maximise their risk-
return profile. These weights vary considerably, from 0.1% to 12%.
Gold has also been used as a hedge assets in currency portfolios.
In Capie, Mills, and Wood (2005) authors studied whether gold can
act as a hedge against currency risk, they show that its ability to act
as a hedge is time varying based on unpredictable political and
economic events. Joy (2011) expanded the sample of dollar pairs
to 16 currencies from 1986 to 2008. Using dynamic conditional
correlation models, this author concludes that gold is a dollar
hedge, and is becoming more strongly so over the 23 year period
examined. Reboredo (2013) also finds that gold acts as a dollar
hedge using weekly data from 2000 to 2011 for 8 currency pairs.
Similar findings of gold as a potentially useful hedge for currencies
are reported in Reboredo and Rivera-Castro (2014) and Lu and

https://doi.org/10.1016/j.eswa.2020.113481
0957-4174/Ó 2020 Elsevier Ltd. All rights reserved.
2 A. Vidal, W. Kristjanpoller / Expert Systems with Applications 157 (2020) 113481
Hamori (2013) also examine the safe haven properties of gold for
currencies; and Apergis (2014) who shows gold is a useful predic-
tor and hedge for the Australian dollar.
On the other hand, gold is defined as safe haven. An asset may
be a hedge, providing protection on average, but fails in times of
extreme stress. Gold is attractive for investors is in times of finan-
cial crisis, and this is widely recognised and frequently mentioned
in the financial press (e.g. Sanderson (2015)). An example of this is
the global stock market crash in August 2015: the S&P500
decreased by 10%, but gold price increased by 5% in US dollars.
Such phenomena also occurred after the financial crisis in 2007
and during Black Monday in 1987. This indicates that gold is a
highly used commodity for reserves of major economies. For the
second quarter of 2017, the official US gold reserve was 8133.5
tons, which is equivalent to 74.5% of total US reserves.
Baur and Lucey (2010) develop the underlying idea of a safe
haven, focused on gold’s relationship to other asset prices at times
of extreme market movements. They define it in terms of its ability
to protect wealth from financial market crashes. These authors
measure market distress as periods when stock or bond indices fall
below 1%, 2.5% and 5% quantile of the return distribution. This also
provides a clear separation of the ideas of a hedge and a safe haven.
Baur and McDermott (2010) refine the definition of a safe haven to
the following, ‘‘A strong (weak) safe haven defined as an asset that
is negatively correlated (uncorrelated) with another asset or port-
folio in certain periods only, e.g. in times of falling stock markets.”
On an empirical level, Baur and Lucey (2010) study the relationship
between US, UK and German stock and bond returns and gold
returns, finding gold is a hedge and a safe haven for stocks, but
not bonds. However, gold is a safe haven only 15 days after a mar-
ket crash. In contrast, Bredin, Conlon, and Potí (2015) apply wave-
let analysis, suggesting that contrary to the 15 day finding of Baur
and Lucey gold is be a safe haven for up to a year. Baur and
McDermott (2010) extend this analysis to a more international
sample and confirm gold’s status as a safe haven for equities but
not for all countries examined. In some countries such as Australia,
Canada, Japan and the BRIC’s, gold is ineffective in protecting
wealth from extreme market movements.
Given the above, gold price volatility prediction is a widely
studied and required task in finance and economics. Auto regres-
sive conditional heteroskedasticity models (ARCH) are normally
used for volatility forecasting, including a wide range of method-
ologies from this family, such as GARCH, EGARCH, ARCH-M, among
others. These have been widely studied for volatility forecasting
(Trück & Liang, 2012), proving their efficiency in capturing short-
term variations. However, a drawback of this type of model is its
difficulty to capture long-term features. On the other hand, Deep
Neural Networks (DNN) possess the ability to learn complex and
non-linear relationships from a dataset, which makes them espe-
cially useful for performing classification and prediction tasks in
the stock market. It is possible to improve forecasts made by clas-
sical econometric models (such as GARCH) with DNNs, since DNNs
have the ability to learn more complex patterns, both in the long-
term and the short-term.
The motivation of this study is to develop a methodology that is
capable of making a significant improvement in the prediction of
gold volatility. This is important in order to better understand
the future behavior of this asset, which as already mentioned is
of vital importance in a large number of investment portfolios. It
seeks to achieve this through the use of modern machine learning
techniques, making the proposed model capable of learning pat-
terns from a large volume of data, which is not necessarily
structured.
With this in mind, we use a Long Short-Term Memory (LSTM)
network, which corresponds to a special type of Recurrent Neural
Network (RNN), combined with a CNN network. Subsequently,
the CNN-LSTM model forecasting will be enriched from an image
provided as an input. To generate the images, a technique will be
used to transform time series into RGB images; these images are
constructed from a number of lags in the series and contain static
information (with respect to lag autocorrelations) and dynamic
information (referring to the probabilities of movement between
different volatility states in the lags). Thus, a series of images is
generated that possesses nonlinear and valuable information in
order to understand the changing patterns of the original series.
These images are processed using a pre-trained Convolutional
Neural Network (CNN), specifically a VGG16 network, transform-
ing the RGB image into a feature vector. The previously mentioned
vector is combined with the output of the LSTM model, and then a
final layer generate the volatility forecast. Finally, the Model Con-
fidence Set (MCS) is applied to compare the predictive ability of
the different models.
As a fundamental hypothesis, it is expected that the transforma-
tion into images will encode important series information and that
the CNN network will be able to identify and extract patterns in
order to use them in volatility forecasting.
The main contributions of this study can be summarized as fol-
lows: first of all, a transformation of time series into images was
used, capturing both static and dynamic series data. To the best
of our knowledge, this type of application has not been previously
used to forecast volatility. Thus, it corresponds to a completely new
approach to extract and use financial time series information.
Although LSTM techniques have been used in financial forecasting
and some CNN studies even aim to predict categorical variables
(such as stock direction), these two Deep Learning tools have yet
to be combined in order to enhance predictive models. For this rea-
son, this study also provides a new perspective regarding this type
of implementation. Secondly, experimental results using gold
prices from the past 50 years show that the proposed CNN-LSTM
model achieves results that improve GARCH model forecasting
by 21% and by more than 10% in the classic LSTM model compared
to its RMSE. Finally, the MCS confirms the CNN-LSTM model as the
best predictive model. These results can be used to obtain better
prediction of the future, especially the volatility behavior of an
asset as widely used as gold. Using this type of analysis, it is possi-
ble to analyze whether it is a good hedge asset in the short term,
which allows more efficient management of the investment.
The rest of this paper is organized as follows: Section 2 provides
a look at studies related to volatility forecasting, the representation
of time series as images, and Deep Learning to forecast time series
and classify images. Section 3 describes the dataset and details the
methodology used, including the generation of RGB images, the
CNN classifier used, modifications to the LSTM model, and evalua-
tion metrics. The experimental results will be presented in Sec-
tion 4. Section 5 shows the conclusions of the paper, and to
finish, Section 6 indicates future implementations.
2. Related works
In this section, some of the most relevant methodologies in time
series volatility forecasting are presented. Given the nature of the
proposed methodology, it will be necessary to review studies con-
cerning the topics of volatility forecasting, the representation of
time series as images, and the deep learning methodologies
applied in prediction and classification.
2.1. Volatility forecasting methods
In the literature, there are a great deal of models capable of fore-
casting volatility; some of the most widely used are the ARCH
models. There are applications of these models aimed at forecast-
 A. Vidal, W. Kristjanpoller / Expert Systems with Applications 157 (2020) 113481
ing the daily price volatility of various commodities such as cocoa,
corn, cotton, gold, silver, sugar, and wheat in the long term, using a
combination of GARCH-ISD (Implied Standard Deviation) models
(Kroner, Kneafsey, & Claessens, 1995). In addition, Tully and
Lucey (2007) investigated macroeconomic influences on gold from
1983 to 2003 using an AP-GARCH model, concluding that the AP-
GARCH model was best fitted to the data, and the most important
explanatory variable was the dollar. Other studies related to this
type of model were conducted by the authors of Trück and Liang
(2012), where they evaluated different models used in volatility
forecasting (GARCH, TARCH, TGARCH, ARMA) in order to study
their predictive ability in the gold market, concluding that the
TARCH model exhibited the best results.
Furthermore, Artificial Neural Networks (ANN) have been used
as volatility forecasting techniques. Parisi, Parisi, and Díaz (2008)
analyzed Recursive Neural Networks and Rolling Neural Networks
as modifications to traditional neural networks, applying these
strategies to predict variations in the price of gold. Kristjanpoller
and Minutolo (2015) predicted gold price volatility with an ANN-
GARCH hybrid model. The results indicated that the proposed
model surpassed the traditional GARCH model in predictive ability.
Machine learning techniques such as SVM (Choudhury, Ghosh,
Bhattacharya, Fernandes, & Tiwari, 2014), fuzzy logic (Dash &
Dash, 2016), ANFIS (Yazdani-Chamzini, Yakhchali,
Volungeviciene, & Zavadskas, 2012), (Kristjanpoller & Michell,
2018), among others, have been widely used in the literature to
predict time series.
2.2. Representation of time series as images
A natural application for the use of CNN is image classification,
where the network is able to learn geometric, chromatic, etc., pat-
terns from a label associated with each image. Subsequently, a
forecast is performed of the label. Regarding this point, financial
time series face a big problem, since they do not possess the ability
to provide information based on images, and the feature matrices,
which can be used to represent information (such as in Gunduz,
Yaslan, & Cataltepe (2017)), do not necessarily possess elements
that can recognize convolutional network architectures (such as
lines, vertices, angles, shadows, etc.).
In Wang and Oates (2015), a new framework was used to
encode time series as different types of images, Gramian Angular
Fields (GAF) and Markov Transition Fields (MTF). This allows the
use of computer vision techniques for classification.
2.3. Deep learning to forecast time series
During recent years, Deep Learning models have generated
great interest in various research areas, including the prediction
of financial time series. Models such as Deep Belief Networks
(DBN), Long Short-Term Memory (LSTM), Gated Recurrent Unit
(GRU), among other architectures, have been widely used in the
state of the art of several stock and commodity market studies.
In Kim and Won (2018), an LSTM model is combined with various
GARCH-type models. The hybrid model generates an improvement
in the performance of realized volatility forecasting for the KOSPI
200 index. In citepbaek2018mod, a new framework for stock mar-
ket forecasting is proposed. This consists of two LSTM modules: the
first prevents the network from overfitting and the second carries
out forecasts. The results indicated that the use of both modules
together significantly improved the LSTM network forecasts. In
Zhu, Yin, and Li (2014), a DBN was used to implement a stock trad-
ing decision system. Data from different stocks belonging to the
S&P 500 were used. The system achieved better results than the
buy and hold strategy.
3
2.4. Deep learning to classify images
Another widely-used Deep Learning architecture is the Convo-
lutional Neural Network (CNN). This methodology is in the state
of the art of various kinds of applications such as image detection,
speech recognition (Mitra et al., 2018), facial recognition (Franc &
Cech, 2018), etc. Despite the success of these architectures in other
sciences, they have yet to be explored in depth in financial prob-
lems. Some studies performed with CNN for time series prediction
are mentioned below.
In Ding, Zhang, Liu, and Duan (2015), a predictive model of
events in the stock market was designed. Initially, the events are
extracted from financial news and represented as a vector using
word embedding. Then, a CNN is trained to model short-term
and long-term influences on stock prices. A model was proposed
which delivered better results than an SVM in the S&P 500 index
and in forecasting individual stocks.
Gunduz et al. (2017) proposed a CNN architecture with ordered
features to forecast the intraday direction of 100 stocks from the
Istanbul Stock Exchange. The proposed classifier obtained better
results than a logistic regression model.
3. Background and proposed model
In this section, details on the dataset used, transformation
methodologies of time series into images, classifiers, and forecast-
ing models will be provided. Also, it will presented the proposed
model. Moreover, the metric used to evaluate each model’s perfor-
mance will also be detailed.
3.1. Datasets
The dataset used corresponds to the daily spot price for the gold
time series of the London Bullion Market Association (LBMA). It
contains 12530 trading days from April 1968 to October 2017.
The dataset was divided into 2 parts: the training set, correspond-
ing to 80% of the data, and the testing set, equivalent to the remain-
ing 20%.
For each element in the price series P t , where the index t
denotes the daily closing price observation, its logarithmic return
rt was calculated.
rt ¼ logPt  logPt1 ð1Þ
Squared logarithmic return is a good approximation of volatility
and can be calculated without knowing the values of future
returns. Thus, the current value and a certain amount of lags (3 lags
for these tests) will be used as a predictor of historical volatility.
Then, historical volatility is calculated as the variance of loga-
rithmic return in a window of 14 days into the future, as shown
in the following equation.
þ14
1 tX
HV t ¼ ðr i 
r t Þ2 ð2Þ
14 i¼tþ1
3.2. Proposed architecture of the CNN-LSTM model
The proposed volatility forecasting model consists of two
stages: first, the generation of the RGB image series It . The second
stage corresponds to the model training, where on the one hand,
the image embedding is generated into a new feature space, and
in parallel, the LSTM layers includes square of logarithmic return
r2t , adding a certain number of lags r2t1 ; r2t2 . . .. The two embed-
dings associated with each of the previous layers are concatenated
and connected with two Dense layers, the first with dimhybrid output
neurons, which allows to generate a reduction in dimensionality
4 A. Vidal, W. Kristjanpoller / Expert Systems with Applications 157 (2020) 113481

from the concatenation, finally the last layer has a single neuron, 3.2.1.2. Markov transition fields. Given the time series X; Q quantile
providing the final output. In this way, the weightings of the bins are identified and each value of xi is assigned its respective
CNN-LSTM network are trained to forecast realized volatility HV t . value of bins qj (j 2 ½1; Q ). Then, an adjacency matrix W is con-
The CNN-LSTM model scheme, detailed in the last stage, is shown structed, of dimensions QxQ, counting the transitions between
below. the different quantile bins in the manner of a Markov chain and
respecting the original order of the series. wi;j is given by the fre-
quency at which a point in the quantile qi is followed by a point
3.2.1. Encoding time series to images
in the quantile qj . Thus, a normalization process is performed so
As mentioned in detail in Wang and Oates (2015), the objective P
of this transformation is to generate an image It , which will form that j wi;j ¼ 1; 8i 2 ½1; Q . W corresponds to the Markov transition
part of the time series. This will be constructed for each of the peri- matrix, then the Markov Transition Field (MTF) is defined as
ods of time t as an RGB image, meaning that it will be made up of 3 follows:
channels. Each channel is expressed as a feature matrix. The first 2 3
type of image is a Gramian Angular Fields (GAF), where the time wijjx1 2qi ;x1 2qj    wijjx1 2qi ;xn 2qj
6w    wijjx2 2qi ;xn 2qj 7
series is represented in a polar coordinate system instead of the 6 ijjx2 2qi ;x1 2qj 7
6 7
typical Cartesian representation. In the GAF matrix, each element M¼6 .. .. .. 7 ð8Þ
6 . . . 7
is the cosine-sine of a sum of angles (thus, 2 channels are defined 4 5
to apply the cosine and sine functions). The second type of image is wijjxn 2qi ;x1 2qj    wijjxn 2qi ;xn 2qj
inspired by studies on the duality between time series and com-
plex networks (Campanharo, Sirer, Malmgren, Ramos, & Amaral, The MTF matrix denotes the transition probability from a quan-
2011), corresponding to Markov Transition Fields (MTF). The main tile qi ! qj for each element of the series X.
idea consists of building the Markov matrix from quantile bins A series of images It ¼ ½Gcos ; Gsin ; M  is constructed from the
after discretization and encoding the likelihood of dynamic transi- three previously described matrices, where Gcos ; Gsin , and M are cal-
tion in a matrix. culated from the series ^rt . Note that the two parameters necessary
Applying these methodologies to a gold time series will be per- to build the series of images are N and Q.
formed in the following manner: for each return value r t , a series
will be generated with N lags. This new series is defined by
3.2.2. For embedding: Convolutional Neural Network (CNN)
^rt ¼ rtn ; rtðn1Þ ; rtðn2Þ ; . . . ; rt ; an image It will be generated from
After generating the series of images It , the information con-
the series ^rt . tained in each of the image channels is used as an input for a
VGG16 network. This generates an embedding that transforms
3.2.1.1. Gramian angular fields. Given the time series the image from its initial dimensions into a new space; this vector
X ¼ x1 ; x2 ; . . . ; xn with N observations, X is rescaled so that all values will be combined with the result of the LSTM network to generate
belong to the interval ½1; 1 from the following transformation. the forecast.
The Convolutional Neural Network (CNN) is basically composed
ðxi  maxð X ÞÞ þ ðxi  minð X ÞÞ of many layers with distinctive architectures, called convolutional
~xi ¼ ð3Þ
maxð X Þ  minð X Þ layers and subsampling (pooling) layers (Wang, Xiang, Zhong, &

Zhou, 2018). The main difference with an MLP is the connection
Then, it is possible to represent two rescaled versions of X in between layers. In the CNN, each local part (receptive field) is con-
polar coordinates: one associated with the cosine function and nected to a single neuron, whereas the inputs in an MLP are fully
another associated with the sine function. connected to the neurons from the next layer.
( There are three main layers in the architecture: the input layer,

/ ¼ arccosð~xi Þ; 1 6 ~xi P 1; ~xi  X hidden layers, and the output layer. Hidden layers basically consist
ð4Þ of convolution layers followed by subsampling layers. Different
r ¼ Nti ; ti N
types of filters to the inputs are used in each convolution layer,
( and the activation function is applied to the resulting output. Thus,

h ¼ arcsinð~xi Þ; 1 6 ~xi P 1; ~xi 2 X the pooling layers are implemented in the activated outputs.
ð5Þ Due to the pooling process, input data with different dimen-
r ¼ Nti ; ti 2 N
sions can be processed by the network. Moreover, this means that
Finally, two GAF matrices can be generated associated with the the location of the pattern in the image will not matter, given that
time series X. the filters will process the entire image. Regarding this, the sub-
2 3 sampling process is the solution for images with rotated or
cosð/1 þ /1 Þ    cosð/1 þ /n Þ expanded objects, or objects in different positions. On the other
6 cosð/ þ / Þ    cosð/ þ / Þ 7 hand, the filters applied to the input data convert low-level attri-
6 2 1 2 n 7
Gcos ¼6
6 .. .. ..
7
7 ð6Þ butes of local parts into representations of high-level attributes
4 . . . 5 in each layer.
cosð/n þ /1 Þ    cosð/n þ /n Þ CNN architectures require multiple hyperparameters to be con-
figured, such as the filter size, stride, and pooling type. Filter size
2 3 indicates the set of inputs to which the transformation kernel will
sinðh1 þ h1 Þ    sinðh1 þ hn Þ
6 sinðh þ h Þ    sinðh þ h Þ 7 be applied in the convolution process. Stride determines how
6 2 1 2 n 7
many steps will be given when running the filtering process.
Gsin ¼6
6 .. .. ..
7
7 ð7Þ
4 . . . 5 Finally, pooling type will indicate which pooling process will be
applied to the filtering output (LeCun, Kavukcuoglu, & Farabet,
sinðhn þ h1 Þ    sinðhn þ hn Þ
2010).
GAF matrices contain information regarding the temporal cor- For this implementation, a VGG16 (Szegedy et al., 2015) net-
relation between two series elements, the dimension of the matrix work pre-trained with the ImageNET Dataset was used, applying
is NxN, and it represents the first two channels of the image It . the following modifications:
 A. Vidal, W. Kristjanpoller / Expert Systems with Applications 157 (2020) 113481
 Up to the layer ’block4_conv3’ (specified in the architecture of
the VGG network) was configured to extract the feature vector
from the images.
 Subsequently, 4 extra layers were added to the model, to per-
form a dimensionality reduction: two convolutional layers
(with 64 and 10 filters and Relu activation function), a Flatten
layer and a Dense layer with parameter ’dim _merge ’, corre-
sponding to the size of the vector that will be combined with
the output of the LSTM network.
3.2.3. For time-series forecasting: Long Short-Term Memory (LSTM)
A Recurrent Neural Network (RNN) learns temporal patterns
using sequential data. The memory properties of RNN are not pre-
sent in the previous deep feedforward networks. However, the
vanishing gradient problem occurs when training standard RNN,
meaning that networks have difficulty retaining information for a
long period of time (Hochreiter, 1998). The LSTM model was devel-
oped to avoid these problems (Hochreiter & Schmidhuber, 1997).
This type of architecture uses memory cells and gates to store
information for long periods of time, or to forget it if it is
unnecessary.
Fig. 1 represents the structure of a memory block, considering
memory cell and gates. xt and ht correspond to the input and hid-
den state, respectively, f t ; it , and ot correspond to the gates associ-
ated with forget, input, and output, respectively. nt is the candidate
input to be stored. Finally, the stored amount is controlled by the
input gate.
For the proposed model, two LSTM layers will be used, entering
3 lags of the logarithmic return squared (with sizes of (dimlstm ) and
(dimmerge ) respectively), the value of dimmerge will remain fixed at
200. The result will be combined with the output of the VGG16
Fig. 1. Proposed CNN-LSTM architecture.
5
network. To train the CNN-LSTM network, it is necessary to define
two parameters associated with the series of images (N; Q ) and two
parameters associated with the architecture of the model (dimlstm
and dimhybrid ). Thus, an estimation will be performed of different
CNN  LSTM n;q;dimlstm ;dimhybrid models. Then, the
CNN  LSTM n;q;dimlstm ;dimhybrid model will be estimated, and the model
that presents the lowest Mean Square Error (MSE) indicator will
be selected.
3.3. Loss function, benchmark models and test
To evaluate the accuracy of the forecasting of the proposed
CNN-LSTM model, the loss function used is Mean Square Error
(MSE). The MSE is validated as the best error measure for volatility
(Fuertes, Izzeldin, & Kalotychou, 2009). Different configurations of
the CNN-LSTM model will be compared with different configura-
tions and models used in related studies to predict gold volatility.
In particular, the models used as benchmarks are Generalized
Autoregressive Conditional Heteroskedasticity (GARCH), Regres-
sion Support Vectors (SVR), Long Term Short Term Memory Net-
works (LSTM) and Convolutional Neural Networks (CNN).
n  2
1X di
MSE ¼ HV t  HV ð9Þ
n i¼1
where HV di corresponds to the volatility estimated by the model and
HV i is the historical volatility, n corresponds to the total number of
predictions made in the test set.
After obtaining the best prediction models, the superiority
accuracy will be tested by the Model Confidence Set (MCS)
(Hansen, Lunde, & Nason, 2003; Hansen, Lunde, & Nason, 2001).
6 A. Vidal, W. Kristjanpoller / Expert Systems with Applications 157 (2020) 113481

To perform this test, MSE is used as a loss function, since it is Table 2

defined as a robust loss function (Patton, 2011). The MCS is a test Top 5 best LSTM-CNN model results varying the main parameters associated with its
architecture.
that discards inferior models based on their predictive capacity
by means of a rule of elimination. The surviving models have a sim- N Q dim_lstm dim_hybrid MSE
ilar predictive capacity associated with the loss function used. The 80 20 200 100 1.9840E08
MCS provides test p-values for each model; the main difference 80 4 50 200 2.0489E08
with other tests is that the selection depends on the data features 60 4 100 200 2.3312E08
80 20 100 200 2.3135E08
and how these can be modeled using a specific methodology. 50 20 100 100 2.3490E08

The parameters used are: the number of lags used to construct the images (N), the
4. Experiments number of quantiles used for the MTF images (Q), the dimension of LSTM1
(DIMLSTM ) and the Dense layer dimension specified after the concatenation
(DIM HYBRID ). The indicator we seek to minimize is the MSE.
4.1. Benchmarking models

The models used as reference points are Generalized Autore-
gressive Conditional Heteroskedasticity (GARCH), Regression Sup-
port Vectors (SVR), Long Term Short Term Memory Networks
(LSTM) and Convolutional Neural Networks (CNN).
The GARCH model was analyzed in more than 400 configura-
tions, with the lowest MSE obtained being 3.1866E08; mean-
while, for the SVR, 500 configurations were tested with a
minimum MSE of 3.5787E08. The 400 ANN models tested have
a lowest MSE of 2.6842E08. It was also included within the mod-
els to compare the ANN-GARCH hybrid model, minimally reducing
the MSE to 2.6807E08. Each of the models of the proposed model
components were independently tested. In the case of CNN, the
best model obtained an MSE of 2.6909E08, while the best LSTM
model reached an MSE of 2.4225E08, showing a superiority over
all of the other analyzed models. Table 1 shows the best 3 config-
urations for each of the models analyzed as benchmarks.
4.2. CNN-LSTM model results
Out of the results observed, the CNN model with parameters
N ¼ 80; Q ¼ 20; dimlstm ¼ 200 and dimhybrid ¼ 100 is selected as the
optimal configuration. The best MSE achieved by the proposed
model is 1.9840E08, which is 18% lower than the best MSE of
the benchmarking models.
Fig. 2 shows the results obtained by the CNN-LSTM model. It is
possible to see that the proposed model generates significant
improvements in volatility peaks, where it is able to predict more
stable patterns of growth and decline during the pre and post peak
days. On the other hand, the LSTM model is only able to predict
these peaks on the basis of punctual jumps from the baseline value.
Another effect that can be observed is in periods where the volatil-
ity remains stable. The CNN-LSTM model is able to predict greater
movement in a higher and lower range than the basal level, while
the LSTM model remains with very low, almost null variations.
Finally, the two effects described qualitatively explain the low
error when incorporating the images as inputs for the hybrid
architecture.

The proposed model was trained for 72 cases, defined by the 4.3. MCS results
following parameters:
N 2 ½50; 60; 80; Q 2 ½4; 20; 40; 80; dimlstm 2 ½50; 100; 200 and To determine the superiority of the proposed model over all the
dimhybrid 2 ½100; 200. The best 5 results are displayed in Table 2. benchmarking models to forecast gold volatility, the Model Confi-

Table 1
Top 3 configuration models for each Benchmark model.

Model Configuration Parameters

GARCH MSE W AR p q
1 3.1866E08 252 1 3 3
2 3.1981E08 252 3 2 2
3 3.2028E08 252 1 2 3
SVR MSE epsilon k C W
1 3.5787E08 0.3 10 1 200
2 3.5787E08 0.3 10 5 200
3 3.5787E08 0.3 10 3 200
ANN MSE AR W L N
1 2.6842E08 24 252 4 20
2 2.6862E08 24 252 4 5
3 2.6911E08 5 252 4 10
ANN-GARCH MSE AR W L N
1 2.6807E08 5 252 4 5
2 2.6827E08 5 252 3 20
3 2.6853E08 24 252 2 20
CNN MSE N Q B
1 2.6909E08 45 40 128
2 2.6926E08 60 20 128
3 2.712E08 28 80 64
LSTM MSE AR E B
1 2.4225E08 30 200 10
2 2.4818E08 15 300 10
3 2.4875E08 20 300 10

The parameters used are: the length of the windows to adjust (W), the number of series lagged (AR), the number of autorregressive terms (p), number of volatility lagged
terms (q), number of layers (L), number of neurons per layer (N), the error slack variable (epsilon), the bound on the Lagrangian multiplier (C), the parameter of desviation for
the gaussian kernel (k), the number of lags used to construct the images (N), the number of quantiles used for the MTF images (Q), the size of the batch for training (B) and the
number of epochs used (E). The indicator we seek to minimize is the RMSE associated with the CNN-LSTM model. For the parameters of SVR see Smola (2004), for the GARCH
parameters see Engle (1982) and Bollerslev (1986)and for ANN and ANN-GARCH parameters see Kristjanpoller and Minutolo (2015).
 A. Vidal, W. Kristjanpoller / Expert Systems with Applications 157 (2020) 113481 7

Fig. 2. CNN-LSTM model vs LSTM model forecasting results and realized volatility.

Table 3
Model Confidence Set results and Accuracy Improvement

Model MSE Improvement MCS p-value The advantages of the CNN-LSTM model proposed in this work,
with respect to other volatility forecasting methodologies, can be
GARCH 3.1866E08 37.74% 0.03
SVR 3.5787E08 44.56% 0.04 summarized as follows:
ANN 2.6842E08 26.09% 0.15
ANN-GARCH 2.6807E08 25.99% 0.19  The main advantage given by this work is to generate better
CNN 2.6909E08 26.27% 0.25
prediction of the future, especially for the volatility behavior
LSTM 2.4225E08 18.10% 0.26
LSTM-CNN 1.9840E08 0.00% 1.00
of an asset as widely used as gold, it will be possible to analyze
whether it is a good hedge asset in the short term, which allows
The improvement means the decreasing percentage of the MSE of the proposed more efficient management the investment portfolio, being able
model compared with each model. The MCS was applied with 10,000 as the number
of bootstrapping and a block length of 100.
to replace or enhance this asset.
 The possibility of expressing the relationships of a time series as
different matrices (equivalent to an image) allows us to analyze
dence Set was applied. There is a superiority M90 of the proposed a greater amount of information to identify relationships
model over all the benchmarking models studied, showing the between increases and decreases in periods of volatility. This
improvement in forecasting accuracy when the image is processed is a great advantage with regards to most traditional models,
by the CNN and used as an input in the LSTM. The results obtained whereas they are only able to extract information directly from
can be observed in Table 3. series lags.
 The CNN model allows us to extract information from data
organized with a different abstraction level, detecting patterns
that can be expressed in different scales, orientations, or per-
5. Discussion and conclusion spectives. This causes parameter detection to be especially
robust.
The use of Deep Learning models in finance is in constant devel-  For each forecast performed by the model, information is being
opment due to the increasing amount of data to which we are used from a large amount of lags, which is expressed through
exposed. The proposed model allows a combination of two tech- the processed image. Then, there are two Deep Learning net-
niques focused on processing completely different data. Given this, works that are specially developed in order to use of this type
various modifications can be developed to investigate potential of data.
advantages to this architecture.
In this study, realized volatility was forecasted for gold price Limitations of the proposed hybrid model:
using different levels of abstraction for information contained in
the price series. Based on return, volatility, and images generated  First, it is important to mention that the hybrid model training
from these data, we managed to train an architecture based on process has a high computational cost, where each iteration in
CNN and LSTM models to forecast realized volatility. the training (for each value of the parameters N; Q ; dimlstm and
Experimental results are obtained from the time series of gold dimhybrid ) takes about 30 min, with hardware suitable for Deep
prices, using 40 years for the training set and 10 years for the test Learning architecture training (NVDIA GTX 1060 6 GB SC
set. In the first stage, the time series of images associated with the GDDR5 graphics card), compared to the simple LSTM model that
logarithmic return of gold is constructed (using the number of lags takes less than a minute to train.
N and the quantity of quantiles Q as parameters). Later, 72 varia-  Secondly, there is an important complication regarding the
tions of the hybrid model were trained, which the previously men- amount of data needed to perform the training in an optimal
tioned series of images combined as inputs and a number of lags way. For gold, it is possible to find records for 50 years, however
associated with return. The optimal combination is obtained for other assets will not have that amount of information, so it is
the configuration N ¼ 80; Q ¼ 20; dimlstm ¼ 200; dimhybrid ¼ 100, not possible to collect a quantity of data that has ideal condi-
obtaining an MSE of 2:3490E  8, decreasing by 18% with respect tions for the hybrid model.
to the best MSE of the models used as a benchmark.  There is a third limitation regarding the types of data used,
From the performed experiments and the subsequent evalua- since these were only from gold prices, which prevents a
tion based on MCS, it was observed that the CNN-LSTM model broader vision that could add much value to the model, relating
achieved a better predictive performance than the other models. patterns related to other market variables.
8 A. Vidal, W. Kristjanpoller / Expert Systems with Applications 157 (2020) 113481
In closing, it is important to explicitly detail the differences of
this work with other previous research, as mentioned in the Sub-
section: 2.3, of all the works that have used Deep Learning tech-
niques for the prediction of time series none have had combined
architectures of the CNN and LSTM type. These architectures have
been used individually to predict categorical variables associated
with the series or to predict some response based on the lags of
the series. In this implementation, a mechanism was generated
with which the CNN network generates an embedding of features
that provides significant information for the prediction of volatil-
ity. Nor have techniques that transform time series into images
been used in the financial field, which results to be an advantage
for the use of these types of architectures. On the other hand classic
models of the GARCH type are based solely on extraction of infor-
mation from the lags for a certain time series, so it loses all the
information related to the dynamics of the series, added to the fact
that it is not capable to process large amounts of information (add-
ing other types of data from the same series or from the market).
Finally, this work provides a new architecture that can be used
for any type of time series forecast.
6. Future works
In order resolve the limitations mentioned in the discussion, the
following modifications could be made in a future
implementation:
 First a methodology could be executed that can identify which
layer of the proposed architecture brings greater value to the
model and which ones contribute the least. In this way a more
bounded architecture could be generated and give priority to a
greater execution of iterations to configure the hyperparame-
ters. Some modifications that could be made in the architecture
are: a different process for generating images, the CNN architec-
ture used, the dimension to combine the embeddings, the quan-
tity and dimension of hidden layers used to reduce
dimensionality, among others.
 To solve the second difficulty, it is necessary to make improve-
ments focused on the amount of data used for training.
Although a horizon of 50 years was used, the amount of data
is far from the optimal quantity for a Deep Learning model.
The power of these architectures lies in harnessing a big data
source that is capable of displaying a large number of patterns
and labels for analysis. For this reason, we propose working
with a high-frequency price source that allows the utilization
of these features for the proposed models.
 Finally, regarding the broader view of the market as a whole, a
greater number of variables that affect the price of gold could be
used in the model. There are numerous studies relating macroe-
conomic variables to gold price Batten, Ciner, and Lucey (2010),
Shafiee and Topal (2010), Elder, Miao, and Ramchander (2012),
such as oil price, inflation, among others.
Declaration of Competing Interest
The authors declare that they have no known competing finan-
cial interests or personal relationships that could have appeared to
influence the work reported in this paper.
CRediT authorship contribution statement
Andrés Vidal: Conceptualization, Methodology, Software, Writ-
ing - original draft, Validation. Werner Kristjanpoller: Supervi-
sion, Validation, Writing - review & editing.
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