Not Random, and Not a Forest: Black-Box ML Turns White

The machine learning (ML) tidal wave is sweeping finance alongside most other industries. Our quants are busy applying new models to various (often old) problems: reinforcement learning for option pricing, deep neural networks for alpha generation, and so on.

Alas, colleagues in model validation – and possibly our regulators – are less enthusiastic, and likely with good reason: these models are often black boxes, making it close to impossible, for example, to explain why an algorithm was short