Signal Decay

Signal decay quantifies the temporal degradation of information value inherent in insider transactions, regulatory filings, or behavioral anomalies. In quant scoring systems, a freshly detected insider purchase typically carries maximum signal strength, but its alpha generation capacity attenuates predictably over days, weeks, or months as the market gradually incorporates the information. Decay rates vary by signal type, market regime, and security liquidity. Short-swing profit rules and Form 4 filings exhibit slower decay in less liquid instruments, while high-frequency directional signals may decay within hours in large-cap equities.

Effective signal decay modeling prevents false positive persistence and ensures that scoring algorithms do not overweight stale intelligence. A typical exponential or power-law decay function reduces signal weight as a function of days elapsed since transaction disclosure, filing date, or detection timestamp. Platforms implementing decay mechanics improve information coefficient and reduce look-ahead bias in backtests by preventing survivor bias in signals that have already dissipated. Decay acceleration often occurs at regulatory announcement windows, earnings releases, or market microstructure shocks that render prior insider intent obsolete.