147: Dr Thomas Starke – Detective Work Leading to Viable Trading Strategies, and the Rise of AI
Chat With Traders
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How to Test Factors
A factor is effectively something that is somehow correlated to the returns of, say, a given stock. We have just for the sake of simplicity, we have the price of gold as a factor. What we can then do is take that price of oil as a factor and apply or we do what you call a Spearman rank correlation. Then we get something from that factor which is called the information coefficient. This information coefficient tells us something about how much information that factor has to the return of the underlying asset that we want to trade.
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