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Spurious Predictability in Financial Machine Learning

Statistical Finance 2026-04-20 v1 Methodology Machine Learning

Abstract

Adaptive specification search generates statistically significant backtests even under martingale-difference nulls. We introduce a falsification audit testing complete predictive workflows against synthetic reference classes, including zero-predictability environments and microstructure placebos. Workflows generating significant walk-forward evidence in these environments are falsified. For passing workflows, we quantify selection-induced performance inflation using an absolute magnitude gap linking optimized in-sample evidence to disjoint walk-forward realizations, adjusted for effective multiplicity. Simulations validate extreme-value scaling under correlated searches and demonstrate detection power under genuine structure. Empirical case studies confirm that many apparent findings represent methodological artifacts rather than genuine predictability.

Keywords

Cite

@article{arxiv.2604.15531,
  title  = {Spurious Predictability in Financial Machine Learning},
  author = {Sotirios D. Nikolopoulos},
  journal= {arXiv preprint arXiv:2604.15531},
  year   = {2026}
}

Comments

49 pages, 10 figures. The QuantAudit R package and full replication scripts will be made publicly available upon journal publication

R2 v1 2026-07-01T12:13:33.526Z