ABSTRACT
This chapter has been set out in the style of a tutorial and provides an overview of some common features of Neo-Classical Quant (NCQ) models and newly emerging paradigms of artificial intelligence and machine learning (AI & ML) models. Models are used for contemplation, abstraction and creative thinking. Models can broadly be classified into three types: linguistic, mathematical and computer models. The central concept of modelling is best explained using a taxonomy or categorization of models. This taxonomy is based on four paradigms of descriptive, normative, prescriptive and decision models. In the domain of finance, the role of time and uncertainty analysis is seen to be paramount. Any ex-ante decision such as trading, or portfolio choice has to take into account future outcomes. Hence, management scientists have been preoccupied with investigating two central challenges, namely, decision-making and predicting. We have chosen a simple problem that requires a directional prediction. We use NCQ and AI & ML models to predict the directional movement of VIX, that is, whether VIX closes above or below the level of the previous day's close.
