Information Coefficient Decay
Information Coefficient Decay — How predictive IC fades with horizon and capacity.
Definition
Information Coefficient (IC) decay is how fast a signal’s rank correlation with forward returns fades across horizons. Steep decay means the edge lives in short windows; flat decay supports slower rebalance and larger capacity.
Why it matters
Capacity, turnover, and cost budgets are IC-decay problems. A strong one-day IC that dies by day five cannot fund a weekly book without crushing implementation shortfall.
Case
A microstructure imbalance signal with IC 0.08 at the open and ~0 by the close belongs in intraday execution, not in a monthly factor sleeve. Treating it as a slow alpha source invents paper Sharpe the live book will never see.
How to read it
Plot IC by horizon, then net of costs. Watch regime dependence (high-vol vs low-vol days). If decay steepens as AUM rises, you are measuring your own footprint, not a stable law of nature.