Improving model performance with the integrated wavelet denoising method

Yi-Ting Chen, Edward W. Sun, Min-Teh Yu

Research output: Contribution to journalArticle

9 Scopus citations

Abstract

Intelligent pattern recognition imposes new challenges in high-frequency financial data mining due to its irregularities and roughness. Based on the wavelet transform for decomposing systematic patterns and noise, in this paper we propose a new integrated wavelet denoising method, named smoothness-oriented wavelet denoising algorithm (SOWDA), that optimally determines the wavelet function, maximal level of decomposition, and the threshold rule by using a smoothness score function that simultaneously detects the global and local extrema. We discuss the properties of our method and propose a new evaluation procedure to show its robustness. In addition, we apply this method both in simulation and empirical investigation. Both the simulation results based on three typical stylized features of financial data and the empirical results in analyzing high-frequency financial data from Frankfurt Stock Exchange confirm that SOWDA significantly (based on the RMSE comparison) improves the performance of classical econometric models after denoising the data with the discrete wavelet transform (DWT) and maximal overlap discrete wavelet transform (MODWT) methods.
Original languageEnglish
Pages (from-to)445-467
Number of pages23
JournalStudies in Nonlinear Dynamics and Econometrics
Volume19
Issue number4
DOIs
StatePublished - Sep 2015

Keywords

  • data denoising; DWT; high-frequency data; MODWT; wavelet

Fingerprint Dive into the research topics of 'Improving model performance with the integrated wavelet denoising method'. Together they form a unique fingerprint.

  • Cite this