Forecasting Stock Market Realized Volatility using Random Forest and Artificial Neural Network in South Africa

Volatility is often used as a key input into several financial models, yet there is still no consensus on the best-performing model in forecasting stock market returns volatility. Conventional time series models such as GARCH are the preferred models in the literature. However, this project aims to first adopt two novel non-linear machine learning algorithms, namely the Random Forest and Artificial Neural Network (ANN). The project then compares the performance of these two models in predicting stock market realized volatility for the JSE Basic Material Index (JBIND) and the JSE Financials Index (JFIN) over a period of five years. Based on the results of the project, the Random Forest model outperformed the ANN model for both the JFIN and JBIND index. Lastly, the COVID effect on the model’s performance was also considered and the results show that the negative impact of COVID on the model’s performance is ambiguous.