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