Alpha Signal Evaluation AI Prompt

Rigorously evaluate the statistical and economic validity of this proposed alpha signal.

Signal description: {{signal_description}}
Signal data: {{signal_data}}
Universe: {{universe}}
Look-ahead period: {{horizon}}

1. Information coefficient (IC) analysis:
   IC = Spearman rank correlation(signal_t, return_{t+h})
   - Compute IC for each cross-section (each time period)
   - Mean IC: expected predictive power per period. IC > 0.05 is economically meaningful for daily signals.
   - IC standard deviation (ICSD): consistency of the signal
   - Information ratio of the signal: IC_mean / IC_std
     IR > 0.5: strong signal. IR > 1.0: exceptional.
   - % of periods with positive IC: > 55% indicates consistent directionality

2. IC decay analysis:
   - Compute IC at horizons h = 1, 5, 10, 21, 63, 126 trading days
   - Plot IC vs horizon: how quickly does predictive power decay?
   - The horizon where IC crosses zero defines the signal's natural holding period
   - Fast decay → short-term signal (high turnover). Slow decay → longer-term signal.

3. Quintile / decile portfolio analysis:
   - Each period: sort universe by signal into 5 (or 10) portfolios
   - Equal-weight each portfolio and compute forward returns
   - Report for each quintile: mean return, std, Sharpe, % periods positive
   - Key test: monotonic relationship from Q1 (low signal) to Q5 (high signal)?
   - Spread return: Q5 − Q1 long-short portfolio
   - Spread Sharpe ratio, drawdown, and turnover

4. Statistical significance testing:
   - t-test on mean IC: H₀: IC_mean = 0. Reject if |t| > 2.0.
   - Account for autocorrelation in IC series: Newey-West standard errors
   - Multiple testing concern: if this signal is one of many tested, apply Bonferroni or BHY correction
   - Bootstrap test: reshuffle signal vs returns 10,000 times and check if observed IC exceeds 95th percentile of null

5. Signal decay and overfitting checks:
   - In-sample vs out-of-sample IC: if in-sample IC >> out-of-sample IC, likely overfitting
   - Publication decay: has this signal's IC declined over time? (Sign of arbitrage)
   - Stability: does IC remain consistent across different market regimes?

6. Practical implementation costs:
   - Turnover rate of the long-short portfolio
   - Effective spread cost at current turnover: does signal survive round-trip transaction costs?
   - Break-even cost: max cost at which signal still generates positive net IC

Return: IC statistics table, IC decay plot, quintile return analysis, significance tests, overfitting checks, and net-of-cost IC estimate.