“`html
Lasso Regression in Finance
Lasso regression, short for Least Absolute Shrinkage and Selection Operator, is a powerful linear regression technique particularly useful in finance for feature selection and model regularization. In financial modeling, datasets often contain a large number of potential predictor variables (e.g., macroeconomic indicators, stock fundamentals, technical indicators). Many of these variables might be irrelevant or highly correlated, leading to overfitting and poor out-of-sample performance. Lasso helps address this problem by adding a penalty term to the ordinary least squares (OLS) objective function.
(more…)