LambdaRankIC: Directly Optimizing Rank IC for Financial Prediction
Authors: Yan Lin, Yihong Su, Yi Yang
Organizations: University of Macau · Hong Kong University of Science and Technology
Abstract
In financial predictions, the performance of machine learning models is often assessed by Rank IC, which is the Spearman rank correlation between the model predictions and the realized asset returns. Despite its wide adoption, most existing models are trained using regression losses or ranking objectives that may not align with Rank IC. We propose LambdaRankIC, a novel learning-to-rank approach that directly optimizes Rank IC. We circumvent the non-differentiability of the ranking operator by deriving the closed-form expression for the lambda gradients induced by the pairwise rank swaps, which enables efficient gradient-based optimization within the LambdaRank framework. We implement LambdaRankIC as a custom objective in XGBoost. Theoretically, we show that our approach optimizes an upper bound on Rank IC. We evaluate the proposed approach on both simulated and real-world financial data. In simulation studies, LambdaRankIC accurately recovers the true ranking structure in noiseless settings and consistently outperforms regression-based and NDCG-oriented ranking methods under low signal-to-noise ratios and heavy-tailed noise regimes. In empirical experiments using real market data, LambdaRankIC achieves the best out-of-sample performance on evaluation metrics commonly used in finance, including Rank IC, ICIR, monthly return, and Sharpe ratio. These results show that directly optimizing Rank IC can yield substantial improvements over conventional learning objectives in financial predictions when the full-order ranking quality is the primary goal.
Financial sentiment classifiers are commonly evaluated against human labels, but strong linguistic performance does not necessarily imply economically useful return predictability. This study separates these questions through two experiments. First, we construct a unified three-class benchmark from five financial text datasets and compare TF--IDF Naive Bayes, off-the-shelf FinBERT and Financial-RoBERTa encoders, zero-shot Qwen2.5-7B, and QLoRA-adapted Qwen2.5-7B, LLaMA3-8B, and Mistral-7B models. Mistral-7B achieves the best test accuracy (0.8840) and macro-F1 (0.8771), while QLoRA raises Qwen2.5's macro-F1 from 0.7274 to 0.8615. An inverse-frequency class-weighted loss does not improve Qwen2.5. Second, we evaluate economic validity on a temporally separate 2019 Benzinga sample containing 10,637 unique headlines and 13,115 headline--stock observations for a fixed S&P~100 universe. Model probabilities are converted into continuous sentiment scores, aggregated by stock and signal date, and aligned with next-session returns over one-, two-, three-, and five-day horizons. All seven downstream models produce positive but small mean rank information coefficients at the one-day horizon; the largest is 0.0143 for FinBERT. None of the 28 model--horizon tests remains significant after Newey--West inference and false-discovery-rate correction. Portfolio results likewise fail to establish a robust advantage for the best-performing classifiers. The findings show that QLoRA is effective for financial sentiment adaptation, while also documenting a clear gap between classification accuracy and tradable cross-sectional signals.
As LLMs become credible readers of earnings calls, investor-relations Q&A, guidance, and disclosure language, supervised financial NLP benchmarks increasingly function as decision evidence for model selection and deployment. A hidden assumption is that gold labels make such evidence objective. This assumption breaks down when the benchmark ruler itself is sensitive to rubric wording, metric choice, or aggregation policy. We study this measurement risk on Japanese Financial Implicit-Commitment Recognition (JF-ICR; a pinned 253-item test split x 4 frontier LLMs x 5 rubrics x 3 temperatures x 5 ordinal metrics). Three findings follow. First, rubric wording materially changes model-assigned labels: R2--R3 agreement ranges from 70.0% to 83.4%, with the dominant movement near the +1 / 0 implicit-commitment boundary. This pattern is consistent with a pragmatic-boundary interpretation, but is not a validated linguistic-causality claim because the present rubric variants confound semantics, examples, and verbosity. Second, not every metric remains informative under the JF-ICR class distribution. Within-one accuracy is too easy because near misses receive credit and the majority class dominates; worst-class accuracy is too noisy because the rarest class has only two examples. Exact accuracy, macro-F1, and weighted \k{appa} are therefore the identifiable metrics under our operational rule. Third, ranking claims become more defensible only after this metric-identifiability audit: Bradley--Terry, Borda, and Ranked Pairs agree on the identifiable metric subset, while the full five-metric sweep produces disagreement on the closest pair. The contribution is not a new leaderboard, but a reporting discipline for supervised financial benchmarks whose gold labels exist and whose evaluation ruler still requires governance.
Learning-to-Rank (LTR) is a supervised machine learning approach that constructs models specifically designed to order a set of items or documents based on their relevance or importance to a given query or context. Despite significant success in real-world information retrieval systems, current LTR methods rely on one prefix ranking metric (e.g., such as Normalized Discounted Cumulative Gain (NDCG) or Mean Average Precision (MAP)) for optimizing the ranking objective function. Such metric-dependent setting limits LTR methods from two perspectives: (1) non-differentiable problem: directly optimizing ranking functions over a given ranking metric is inherently non-smooth, making the training process unstable and inefficient; (2) limited ranking utility: optimizing over one single metric makes it difficult to generalize well to other ranking metrics of interest. To address the above issues, we propose a novel listwise LTR framework for efficient and generalizable ranking purpose. Specifically, we propose a new differentiable ranking loss that combines a smooth approximation to the ranking operator with the average mean square loss per query. Then, we adapt gradient-boosting machines to minimize our proposed loss with respect to each list, a novel contribution. Finally, extensive experimental results confirm that our method outperforms the current state-of-the-art in information retrieval measures with similar efficiency.