By Michael Kozlov1
The main goal of alpha research is to predict and outperform the market. However, most investors desire not only returns, but also low risk exposure, predictability of trading results, etc. All these conditions lead us to definitions of a robust alpha.
A robust alpha should have the following properties:
We will describe below some useful methods for improving the robustness of an alpha.
Ranking: Ranking is an operation that replaces a vector’s elements with their ranks (from 0 to vector_size-1), under some sorting. Usually all vector’s elements are also divided by vector_size-1, to be in the interval [0,1]. If two values are the same, they are supposed to have the same rank that equals to the average of their corresponding ...