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Risk-Adjusted Performance of Random Forest Models in High-Frequency Trading

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Listed:
  • Akash Deep
  • Abootaleb Shirvani
  • Chris Monico
  • Svetlozar Rachev
  • Frank J. Fabozzi

Abstract

Because of the theoretical challenges posed by the Efficient Market Hypothesis to technical analysis, the effectiveness of technical indicators in high-frequency trading remains inadequately explored, particularly at the minute-level frequency, where effects of the microstructure of the market dominate. This study evaluates the integration of traditional technical indicators with random forest regression models using minute-level SPY data, analyzing 13 distinct model configurations. Our empirical results reveal a stark contrast between in-sample and out-of-sample performance, with $R^2$ values deteriorating from 0.749--0.812 during training to negative values in testing. A feature importance analysis demonstrates that primary price-based features dominate the predictions made by the model, accounting for over 60% of the importance, while established technical indicators, such as RSI and Bollinger Bands, account for only 14%--15%. Although the indicator-enhanced models achieved superior risk-adjusted metrics, with Rachev ratios between 0.919 and 0.961, they consistently underperformed a simple buy-and-hold strategy, generating returns ranging from -2.4% to -3.9%. These findings challenge conventional assumptions about the usefulness of technical indicators in algorithmic trading, suggesting that in high-frequency contexts, they may be more relevant to risk management rather than to predicting returns. For practitioners and researchers, our findings indicate that successful high-frequency trading strategies should focus on adaptive feature selection and regime-specific modeling rather than relying on traditional technical indicators, as well as indicating the critical importance of robust out-of-sample testing in the development of a model.

Suggested Citation

  • Akash Deep & Abootaleb Shirvani & Chris Monico & Svetlozar Rachev & Frank J. Fabozzi, 2024. "Risk-Adjusted Performance of Random Forest Models in High-Frequency Trading," Papers 2412.15448, arXiv.org, revised Feb 2025.
  • Handle: RePEc:arx:papers:2412.15448
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    References listed on IDEAS

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