by Hsin-Yu Chiu, Jen-Yin Yeh, Jhih-Huei Huang
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Suggested foundations for financial machine learning and risk measurement and stress. Specialist prerequisites vary by paper.
Preserve time order and avoid future information in training.
Establish an interpretable baseline before a flexible model.
Represent losses as a distribution rather than one forecast.
Distinguish a loss quantile from the average loss in the tail.
Account for dependence and overlapping observations.
Examine which information contributes to predictions.
Compare risk estimators and their assumptions.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.
Connect diversification, common risk factors, investor views, and the properties of a risk measure.