Standardize Returns and Volatility Before SHAP Feature Analysis

Summary

The document asks how to assess feature autocorrelation in a trend strategy using XGBoost and SHAP when mean return and volatility appear to dominate feature importance. The author describes centering mean returns by the portfolio mean and scaling volatility relative to portfolio volatility, then asks whether to calculate the Sharpe ratio from standardized or original values. The accepted response says the proposed solution requires standardized data.

This is a narrow recommendation rather than a full method: it does not explain how the transformations affect Sharpe ratios, SHAP attributions, or the interpretation of autocorrelation. It provides no data, comparison, or empirical evidence, and the referenced explanation is not reproduced. Readers should therefore treat the answer as specific to the proposed analysis, not as a general rule that Sharpe ratios should always be computed from standardized returns.

Key ideas

• The question concerns SHAP feature importance in an XGBoost analysis of a trend strategy.
• Mean return and volatility appeared to overshadow autocorrelation features before scaling.
• The suggested approach is to use standardized data for the Sharpe ratio in this setup.
• The answer gives little detail on why the transformation is required or how to interpret the result.

Tags

# Standardizing Sharpe Ratio or not when standardizing Features


# Standardizing Sharpe Ratio or not when standardizing Features












I am currently trying to check the Feature Autocorrelation for a Trend Strategy. I am using XGBoost for that purpose. In addition I work with SHAP.

In the first run I realized that without Standardization of the Mean Return and Volatility SHAP will give those two Features a importance that high, so that SHAP isn't able to check the Autocorrelation Features. Now I standardized the Mean return by subtracting the mean of the portfolio to every cell. I standardized the Vola by diving the previous calculated value by the Vola of the Portfolio and multipliying by 0.015.

I am checking the Autocorrelation by the Risk-Adjusted return (Sharpe Ratio) my question is now: Do I need to use the Standardized Values for Sharpe Ratio or the NOT standardized Values?

## Answer by user14334602 (score 0, accepted)

https://quant.stackexchange.com/a/65623

It is not possible. For this solution you need to use the standardized data.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.