Ensemble Learning Applied to Quant Equity: Gradient Boosting in a Multifactor Framework

This chapter proposes to benefit from the advantages of machine learning (ML) in general and boosted trees in particular, e.g. non‐linearity, regularization and good generalization results, scaling up well with lots of data. It gives a mildly technical introduction to boosted trees. The chapter introduces the construction of the dataset with the feature and labels engineering, and the calibration of the ML applying rigorous protocol established by the computer science community. It describes the data used and the empirical protocol for the ML model. The chapter also introduces the concept of confusion matrix and all the related metrics in order to precisely assess a ML model's quality. It provides guidance on how to tune, train and test an ML‐based model using traditional financial characteristics such as valuation and profitability metrics, but also price momentum, risk estimates, volume and liquidity characteristic.