Best Way to Guard Against Investment Strategy Flame-outs?
August 4, 2016 - Big Ideas
Can investors avoid strategy flame-outs associated with overly enthusiastic backtesting (overfitting)? In his July 2016 paper entitled “Limitations of Quantitative Claims About Trading Strategy Evaluation”, Michael Harris presents two examples that demonstrate a key limitation of trading strategy backtesting:
- U.S. stock market trend following.
- U.S. stock market mean reversion.
Specifically, he compares performances of such strategies before and after 1997 to illustrate the interaction of backtesting and change in market conditions. Using daily S&P 500 Index returns (excluding dividends) during January 1950 through December 2015, he finds that: Keep Reading