Hands-On Machine Learning for Algorithmic Trading

How ridge regression works

The ridge regression shrinks the regression coefficients by adding a penalty to the objective function that equals the sum of the squared coefficients, which in turn corresponds to the L² norm of the coefficient vector:

Hence, the ridge coefficients are defined as:

The intercept has been excluded from the penalty to make the procedure independent of the origin chosen for the output variable—otherwise, adding a constant ...