Estimation of realized volatility of cryptocurrencies using CEEMDAN-RF-LSTM

Abstract

Predicting cryptocurrency volatility is crucial for investors, traders, and decision-makers but is complicated by the market’s high non-linearity, volatility, and noise. This paper presents a novel approach, the CEEMDAN-RF-LSTM hybrid model, which is the first to combine the strengths of Complete Ensemble Empirical Mode Decomposition with Adaptive Noise (CEEMDAN), Random Forest (RF), and Long Short-Term Memory Network (LSTM) to predict the Realized Volatility (RV) of mainstream cryptocurrencies. The model exploits CEEMDAN’s proficiency in processing non-linear and non-stationary signals, RF’s exceptional feature selection capabilities, and LSTM’s distinctive advantages in dealing with time-series problems. Applied to actual transaction data for Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB), empirical results show the superior performance of our model in predicting actual cryptocurrency volatility. These findings contribute to the academic understanding of cryptocurrency volatility and provide practical guidance for quantitative trading strategy development, offering fresh insights and methodologies for related research fields.