Machine Learning In Financial Markets
Machine Learning in Financial Markets#
What are we trying to predict?#
The action of making a prediction will change the outcome in the real world. Ie. you are in the game, like chess.
Predicting returns is the hardest thing you can do.
Some predictions do not matter for “reflexivity”.
Weather and petrol consumption are not reflexive.
The point is to exceed the accuracy of traditional models.
What are you trying to predict?#
Time horizon: 1 hour, 1 week, 1 month or 1 year.
Predict just sign or magnitude?
Benchmark or Baseline Strategy#
People from outside of economics would think a prediction of sign greater than 50% would be a success. The machine learning algorithm needs to beat the human trader. Many mean-reversion and momentum traders are already above 50%.