What are the best ways to apply backtesting in the development of investment strategies? In their July 2024 paper entitled "The Three Types of Backtests", Jacques Joubert, Dragan Sestovic, Illya Barziy, Walter Distaso and Marcos Lopez de Prado offer guidance on backtesting best practices by reviewing:
- Strengths and weaknesses of the three main types of backtests (walk-forward, resampling and Monte Carlo simulation).
- Ways to enhance the quality of backtests.
- Mitigation of the confounding effects of running multiple tests on the same data.
Based on theoretical and practical considerations, they conclude that:
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