The Effectiveness of Combining Empirical Decomposition Mode and Machine Learning Tools on Bitcoin Volatility Prediction

Subject Areas : Financial Economics

Leili Nikbakht ¹ , Shahram Fattahi ² , Abbas Aflatooni ³ , Aghdas Ghomsheh ⁴

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Received: 2025-04-05 Accepted : 2025-06-13 Published : 2025-04-23

Keywords: Bitcoin, Empirical Decomposition Mode (EMD) , Artificial Neural Network (ANN), Recurrent Neural Network (RNN) Long Short-Term Memory (LSTM),

Abstract :

 

This study explores whether combining Empirical Mode Decomposition (EMD) with machine learning models Artificial Neural Networks (ANN), Recurrent Neural Networks (RNN), and Long Short-Term Memory (LSTM)—can improve the accuracy of Bitcoin price volatility (VBTC) predictions. Utilizing daily Bitcoin price data from September 2011 to December 2024, the research, conducted using R software, compares the performance of hybrid models (EMD-ANN, EMD-RNN, EMD-LSTM) against standalone machine learning models and traditional time series methods like ARIMA. The results demonstrate that hybrid models significantly outperform their non-hybrid counterparts, with the EMD-RNN model achieving the highest accuracy, reducing Mean Absolute Error (MAE) by 95.76% and Root Mean Squared Error (RMSE) by 96.35%. The decomposition of VBTC into Intrinsic Mode Functions (IMFs) revealed distinct short-term and long-term volatility components, providing deeper insights into market behavior. The findings highlight the superiority of integrating EMD with machine learning for volatility forecasting, offering enhanced predictive accuracy and robustness. This research underscores the potential of advanced analytical techniques in improving risk management and investment strategies in highly volatile cryptocurrency markets.

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