Predicting Alpha: A Survey of Return-Forecasting Signals and Their Evaluation

Resumenen inglés, como el paper

An alpha signal is a quantity that can be computed from information available today and that helps predict the part of an asset's future return which is not compensation for bearing known risks. The search for such signals is the central activity of quantitative investing, and the same statistical machinery that uncovers a genuine signal will, used without care, manufacture many false ones. This paper surveys what the empirical asset-pricing literature has learned about predicting alpha, for a reader with quantitative training but no specialist background in the field. It builds the definition of an alpha signal from first principles and separates a return predictor from the risk-adjusted edge it may contain. It maps the four areas in which predictors have been documented, namely the cross-section of firm characteristics, the time series of the market premium, the microstructure of trading, and the dynamics of volatility. It then sets out how a candidate signal should be evaluated. The requirements are out-of-sample accuracy, economic significance after trading costs, corrections for the number of signals tried, and calibrated statements of uncertainty. The paper closes with the open problems, among them non-stationarity, the decay of signals after publication, the low signal-to-noise ratio at daily horizons, and the integration of machine learning with multiplicity-aware evaluation. The main lesson of the literature is that measurement, and not discovery, is the scarce skill.

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Cómo citar este paper

Shehadi Candela, A. (2026). Predicting Alpha: A Survey of Return-Forecasting Signals and Their Evaluation. QUAFI Working Paper No. 2026-01. QUAFI Research.

@techreport{shehadi2026alpha,
  author      = {Shehadi Candela, Agust\'in},
  title       = {Predicting Alpha: A Survey of Return-Forecasting Signals and Their Evaluation},
  institution = {QUAFI Research},
  type        = {QUAFI Working Paper},
  number      = {2026-01},
  year        = {2026}
}

Historial de versiones

1. v1.113 sep 2026exposition revised throughout; structure and register brought in line with journal practice; no change to results or references
2. v1.01 mar 2026first working-paper draft