Feature Selection

Feature selection can improve both predictive accuracy and intuition about regime-dependence of your trading strategy.

  • Find out the most important factors affecting profitability.
  • Rank these factors by importance scores.
  • Use only factors with high scores to predict profitability.
  • Improves out-of-sample predictive accuracy by building more parsimonious models. (See our recent blog post.)

Example: A short volatility strategy

  • Use strategy returns as target variables (labels).
  • Use VIX, 1-day SPY return, interest rate change, etc. as predictors (features).
  • Feature selection may tell us: