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Embargo

A gap of dropped observations immediately after a test fold, preventing serial correlation from leaking test information into later training data.

Purging handles the training rows before a test fold. The embargo handles the rows just after it. Because returns and features are autocorrelated, a training row dated one day after the test fold still carries information about the end of that fold.

The convention is to embargo about 1% of the total sample length, or the length of the feature lookback, whichever is larger. On 5,000 daily observations with a 60-day feature window, embargo 60 days after each test fold.

It feels wasteful to throw away data, and it is: with 5 folds and a 60-day embargo you lose 300 observations. That cost buys you an accuracy estimate you can believe, which is worth far more than 6% more rows.

Related: purged-cross-validation, cross-validation, data-leakage

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