Performance-Driven Causal Signal Engineering for Financial Markets under Non-Stationarity

TL;DR

This paper presents a causal signal engineering framework for non-stationary financial time series that enhances anticipatory signals and reduces risk without relying on non-causal data or complex models.

Contribution

It introduces a novel, strictly causal, and adaptive method combining heterogeneous indicators and derivative components for non-stationary systems.

Findings

Smoother trajectories and reduced drawdowns in high-frequency trading simulations

Enhanced local phase-leading effects near regime transitions

Risk-reshaping effects demonstrated under controlled zero-cost settings

Abstract

We introduce a performance-driven framework for constructing strictly causal forward-oriented observables in strongly non-stationary time series. The method combines a robustly normalized composite of heterogeneous indicators with a causally computed derivative component, yielding a local phase-leading effect that is amplified near regime transitions while remaining fully causal. A hysteresis-based decision functional maps the observable into discrete system states, with execution delayed by one step to preserve strict temporal ordering. Adaptation is achieved through a walk-forward scheme, in which model parameters are selected using rolling train--validation windows and subsequently applied out-of-sample. In this setting, the validation segment acts as an internal performance screen rather than as a statistical validation set, and no claims of generalization are inferred from it alone. The framework is evaluated on high-frequency financial time series as an experimentally accessible realization of a non-stationary complex system. Under a controlled zero-cost setting, the resulting dynamics exhibit a pronounced risk-reshaping effect, characterized by smoother trajectories and reduced drawdowns relative to direct exposure, and should be interpreted as an upper bound on achievable performance. These results illustrate how causal signal engineering can generate anticipatory structure in non-stationary systems without relying on non-causal information, explicit horizon labeling, or high-capacity predictive models.