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arXiv · 2610.03019

Signal Simplification Is Not Predictive Simplification: Diagnosing Residual Neural Forecasting in Short-Horizon Volatility

Bingqi Lian·Linfeng Cheng·Mei Lu·Jerry Wu
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Abstract

Hybrid statistical-neural pipelines often assume that a successful statistical first stage leaves a cleaner and more learnable residual target. We examine that assumption in short-horizon volatility forecasting through a signal-forecast-system diagnostic framework. Across five liquid U.S. assets, a volatility-aligned HAR-style model outperforms AR, MA, and ARIMA. Within expanding training windows, the pre-standardization fitted residual process used to construct residual-LSTM sequences has about 82% lower variance than the corresponding target and near-zero lag-1 autocorrelation; independently, rolling pseudo-out-of-sample HAR errors show about 74% variance reduction and similarly weak lag-1 dependence. Residual-only LSTM augmentation nevertheless raises mean squared error from 0.3049 to 0.3594 on average, with deterioration on every asset. Pure LSTM records the lowest selected pseudo-out-of-sample MSE, 0.2649, while the residual hybrid requires substantially more end-to-end runtime without improving accuracy. We describe this pattern as forecaster-preconditioner asymmetry: first-stage forecasting success and statistical residual simplification need not translate into useful downstream neural preconditioning.

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Bingqi Lian, Linfeng Cheng, Mei Lu, Jerry Wu. 2026-10-02. Signal Simplification Is Not Predictive Simplification: Diagnosing Residual Neural Forecasting in Short-Horizon Volatility. https://arxiv.org/abs/2610.03019

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