A Backtesting Protocol in the Era of Machine Learning

ArXiv ID: ssrn-3275654 “View on arXiv”

Authors: Unknown

Abstract

Machine learning offers a set of powerful tools that holds considerable promise for investment management. As with most quantitative applications in finance, th

Keywords: Machine Learning, Investment Management, Quantitative Finance, Asset Pricing, Algorithmic Trading

Complexity vs Empirical Score

• Math Complexity: 3.0/10
• Empirical Rigor: 7.0/10
• Quadrant: Street Traders
• Why: The paper focuses on a research protocol for backtesting and data mining, with moderate empirical rigor involving practical concerns like overfitting and data scarcity, but lacks advanced mathematical derivations, centering instead on statistical concepts and real-world data challenges.

  flowchart TD
    A["Research Goal: Develop robust backtesting protocol for ML in finance"] --> B["Data: Cross-sectional stock data & fundamental features"]
    B --> C["Methodology: ML pipelines with walk-forward validation"]
    C --> D["Computation: Model training, hyperparameter tuning, & signal generation"]
    D --> E["Risk Controls: Transaction costs, liquidity constraints, & overfitting tests"]
    E --> F["Key Outcomes: Generalizable signals & realistic performance metrics"]
    F --> G["Implication: ML requires rigorous validation to avoid false discoveries"]