Forecasting Done Right

Various thoughts on forecasting

Introduction

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There is no doubt that regardless of whatever area of quant you end up in, you will end up having to do some degree of forecasting. Whether that is forecasting returns (for stat arb strategies), funding rates (for funding arb strategies), volumes (for execution strategies), or even parameters is a vol curve, it is a problem that comes up time and time again in the work of quants. Today, me and Systematic Long Short are going to be walking through our thoughts on how to do forecasting properly with some practical tips. We focus primarily on return forecasting in a statistical arbitrage manager context.

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Index

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[Quant Arb]

1. Introduction

2. Index

3. What are we forecasting

4. Implicit Forecasts (and why they work!)

5. Models

6. Features come first

7. What doesn’t work

   1. Dropping features at the model level

   2. Dimensionality reductions

   3. Lots of bad features

8. Forecasting isn’t the best edge…

[Systematic Long Short] - On Combining Forecasts

9. The Limits Of Diversification

10. Optimal Forecast Weighting

11. When Forecast Combining Breaks Down

12. A Few Simple Heuristics…