Is machine learning really a game changer for finance? This paper1 by three renowned finance professors discusses the implications of machine learning for investment management.
They argue that machine learning provides a set of powerful tools that holds considerable promise for investment management, but that the danger of misapplying these techniques can lead to disappointment.
One crucial limitation involves data availability. Many of machine learning’s early successes originated in the physical and biological sciences, in which truly vast amounts of data are available. Machine learning applications often require far more data than are available in finance, which is of particular concern in longer-horizon investing. Hence, choosing the right applications before applying the tools is important.
In addition, capital markets reflect the actions of people, which may be influenced by others’ actions and by the findings of past research. The authors address these concerns by proposing a research protocol that pertains both to the application of machine learning techniques and to quantitative finance in general. Their guidelines bear a lot of resemblance to the principles in the investment philosophy that we already adhere to for our quantitative strategies.
1 Arnott, Harvey & Markowitz, “A Backtesting Protocol in the Era of Machine Learning”, working paper, 2018.
Robeco Institutional Asset Management B.V. (DIFC Branch) is regulated by the Dubai Financial Services Authority (“DFSA”) and only deals with Professional Clients and Market Counterparties, and does not deal with Retail Clients as defined by the DFSA.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.