Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

When faced with a black box trading strategy with extensive historical data available, how would one select/construct a representative benchmark?

As a trivial example, when a strategy historically consists only of long trades on tech stock, the Nasdaq Composite index might be a suitable benchmark.

What about benchmarks for strategies that do not exhibit such clear tendencies in the types of trades they perform?

I can imagine constructing a composite benchmark would be appropriate. Which guidelines/ frameworks/methodologies are applicable?

share|improve this question
add comment

1 Answer 1

Clearly, it's much more difficult than for a white-box strategy.

But you still have some information:

  • What is the return profile?
  • What is the average holding period?
  • Does it go long/short?
  • What assets are traded?

Now you can choose a benchmark of an index that matches these criteria as closely as possible. If an appropriate benchmark doesn't exist, then you can create one: produce a very simple model that characterizes the return profile and run it as your own index (just for benchmarking purposes).

share|improve this answer
add comment

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.