In quant trading, we rely on mathematical models, commonly called alphas, which are used to predict a component or a direction of future behaviour of financial securities of interest. Alphas are an important element in producing a forecast in price or returns, and one of the key components in making informed trading decisions to secure a profit. Being a key source of competitive advantage, the accuracy of estimating the magnitude of alphas in a particular direction is of utmost importance for systematic traders.
One interesting phenomenon, henceforth referred to as alpha decay, is the loss in predictive power of an alpha model over time. Alpha decay presents a serious challenge for systematic traders as it leads to poorly-informed trading decisions which can have a substantial financial cost.