Hands-On Machine Learning for Algorithmic Trading

Engineering alpha factors

Alpha factors are transformations of market, fundamental, and alternative data that contain predictive signals. They are designed to capture risks that drive asset returns. One set of factors describes fundamental, economy-wide variables such as growth, inflation, volatility, productivity, and demographic risk. Another set consists of tradeable investment styles such as the market portfolio, value-growth investing, and momentum investing.

There are also factors that explain price movements based on the economics or institutional setting of financial markets, or investor behavior, including known biases of this behavior. The economic theory behind factors can be rational, where the factors have high returns over the ...