Objective research to aid investing decisions
Menu
Value Allocations for November 2019 (Final)
Cash TLT LQD SPY
Momentum Allocations for November 2019 (Final)
1st ETF 2nd ETF 3rd ETF

Data Perturb/Replay to Test Strategy Sensitivities

Posted in Big Ideas

How can investment advisors apply historical asset performance data to address client views regarding future market/economic conditions? In their February 2018 paper entitled "Matching Market Views and Strategies: A New Risk Framework for Optimal Selection", Adil Reghai and Gaël Riboulet present an approach for quantitatively relating historical asset return statistics to investor views. They intend this approach to address the widespread problem of backtest overfitting, whereby researchers discover good performance by fitting strategy features to noise in an historical dataset. Specifically, they:

  1. Collect historical return data for assets of interest and run backtests of alternative strategies on these data.
  2. Perturb historical average return, volatility, skewness and pairwise correlations up or down for these assets and rerun backtests of alternative strategies on multiple perturbations.
  3. Analyze relationships between directions of these perturbations and performance of alternative strategies.
  4. Match investor views first to directions of perturbations and then to strategies responding favorably (or least unfavorably) to these directions.

They apply this approach to generic algorithmic strategies (equal weight, momentum, mean reversion and carry). Based on mathematical derivations and examples, they conclude that:

Please or subscribe to continue reading...
Gain access to hundreds of premium articles, our momentum strategy, full RSS feeds, and more!  Learn more

Daily Email Updates
Login
Research Categories
Recent Research
Popular Posts