Beyond Deep Learning: An Econometric Example

In the past, in many areas, the best prediction models were linear and nonlinear parametric models. In the last decade, in many application areas, deep learning has shown to lead to more accurate predictions than the parametric models. Deep learning-based predictions are reasonably accurate, but not perfect. How can we achieve better accuracy? To achieve this objective, we propose to combine neural networks with parametric model: namely, to train neural networks not on the original data, but on the differences between the actual data and the predictions of the parametric model. On the example of predicting currency exchange rate, we show that this idea indeed leads to more accurate predictions.