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Exploring the predictability of attention mechanism with LSTM: Evidence from EU carbon futures prices

Author

Listed:
  • Duan, Kun
  • Wang, Rui
  • Chen, Shun
  • Ge, Lei

Abstract

This paper forecasts the price dynamics of carbon futures in the form of return under the EU emission trading scheme by using an attention mechanism based long short-term memory (AttLSTM) neural network. Prediction of the carbon price dynamics exploits not only historical information of itself but also that of its key predictors, including the price dynamics in fossil energy and stock markets. We find that the attention mechanism can significantly improve the LSTM prediction for the carbon price dynamics. The superior predictability of AttLSTM is examined by its lower MSE, MAE, and RMSE values in the out-of-sample forecasting against a standard LSTM prediction both in various parameter settings and tuning experiments, respectively. This is further demonstrated by the Wilcoxon signed rank test and Diebold Marian test. Our results reveal strong predictive performance of the AttLSTM for the carbon futures price dynamics, and corresponding implications should be of interest to various stakeholders.

Suggested Citation

  • Duan, Kun & Wang, Rui & Chen, Shun & Ge, Lei, 2023. "Exploring the predictability of attention mechanism with LSTM: Evidence from EU carbon futures prices," Research in International Business and Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:riibaf:v:66:y:2023:i:c:s0275531923001460
    DOI: 10.1016/j.ribaf.2023.102020
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    Keywords

    LSTM; Attention; Prediction; Futures price; EU carbon market;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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