The process of evaluating a strategy, theory, or model by applying it to historical data.

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30
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5answers
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What are the key risks to the quantitative strategy development process?

Prompted in part by this question on data snooping, I would be interested to know: What are the key risks that should be considered when developing a quantitative strategy based on: (a) historical ...
28
votes
6answers
3k views

What are the popular methodologies to minimize data snooping?

Are there common procedures prior or posterior backtesting to ensure that a quantitative trading strategy has real predictive power and is not just one of the thing that has worked in the past by pure ...
27
votes
7answers
6k views

What broker/feed/APIsetup allows for recording the most accurate data (cheaply)?

I'm currently using IB's Java API and getting feeds through them. However the real-time feed is updated only every 250ms and the historical feed only every second. I'm primarily looking for ES data ...
20
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8answers
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How to design a custom equity backtester?

I was thinking about writing my own backtester and I realize I have to make some assumptions. So I was hoping I could post what I am planning on doing and hopefully some of you can give me some ideas ...
20
votes
2answers
2k views

How much data is needed to validate a short-horizon trading strategy?

Suppose one has an idea for a short-horizon trading strategy, which we will define as having an average holding period of under 1 week and a required latency between signal calculation and execution ...
17
votes
3answers
3k views

Main backtesting & trading solutions: QuantFactory, Deltix, etc.

What are the most used/mature/promising commercial solutions today which handle backtesting/ automated trading needs? I'm talking about vertical product suites like QuantFactory or Deltix which ...
16
votes
4answers
2k views

Evaluating automated trading strategies: accepted practice

Both for private projects, and for clients, I've been working on code a lot this year to evaluate automated trading strategies. This often ends up turning into the task of how to fairly compare apples ...
13
votes
4answers
6k views

Are there any good tools for back testing options strategies?

There are all kinds of tools for backtesting linear instruments (like stocks or stock indices). It is a completely different story when it comes to option strategies. Most of the tools used are ...
12
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3answers
794 views

How to account for transaction costs in a simulated market environment?

I am simulating a market for my trading system. I have no ask-bid prices in my dataset and use adjusted close for both buy and sell price. To account for this I plan to use a relative transaction ...
11
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3answers
3k views

Papers about backtesting option trading strategies

I am looking for all kinds of research concerning option trading strategies. With that I mean papers that publish results on different option trading strategies properly backtested with real-world ...
11
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3answers
576 views

What benchmark/index to use for backtesting a portfolio of stock options?

What benchmark should I use for backtesting a model for when I should buy an option of a particular stock? For equities, one could say their portfolio outperformed the S&P 500. I would like to ...
11
votes
2answers
1k views

How to build a regime-switching model which knows its own limits?

In recent months I've come to the conclusion that there are not only certain regimes in the markets (like bear or bull) but phases where all models fail because we are in uncharted territory. The ...
10
votes
3answers
633 views

Literature on generating synthetic time series for testing

I have some market data (daily time series) for bond prices and CDS indices and I would like to generate synthetic versions of these which are statistically "similar" for testing trading strategies. ...
10
votes
5answers
1k views

How to conduct Monte Carlo simulations to test validity of Black Scholes for a specific option?

In reference to the original Black Scholes model, what approach is best to test the model in a rigorous way? Is there a standard approach that can accomplish this in a reasonable amount of time? ...
10
votes
3answers
354 views

How to account for market movement when some exchanges are closed?

Daily data, such as open and close prices, is often available for much longer periods than high-frequency data. However, whenever backtesting any strategy that examines instruments traded in different ...
10
votes
1answer
417 views

Comparing backtesting returns with real trading returns

I have 10 years of backtested simulated performance of some trading strategy (using historical prices), and N months of actual trading performance. What statistical test can I do find out if I'm on ...
9
votes
2answers
1k views

How to simulate slippage

I'm backtesting a trading strategy, using free OHLC data from yahoo or google. I'm simulating friction by lopping a flat percentage (say 0.5%) off my returns for each day that I make a trade. Whats ...
9
votes
1answer
476 views

What to ask for in a good prototyping framework?

Reading up on quantitative methods, model development, and back-testing, one obvious question springs to mind: What should one ask of a prototyping (model testing) framework? I know a lot of people ...
9
votes
3answers
2k views

What is the ideal ratio of in-sample length to out-of-sample length?

Suppose you are running a portfolio of quantitative strategies and that you develop a new potential strategy to be added to the mix. Assume for simplicity that the new strategy is independent of the ...
8
votes
4answers
387 views

Seeking Historical Non-Finance Datapoints for Backtesting

I'm working on some financial analysis code which I'd like to test against a historical dataseries to analyze the correlations to my algorithm to some non-finance related data. Ideally, I'd like to ...
8
votes
4answers
685 views

What are the risk factors in analysing strategies?

What do you think of strategies displayed on timelyportfolio.blogspot.com? I really like the fact that there is some code to reproduce the strategies, but they seem very elementary because he does ...
8
votes
1answer
413 views

Any research paper on stop loss?

Has there been any rigorous study on stop loss ? When to apply it? Has it been shown to work through proper statistical backtests? I am interested in Equities, preferably European stocks.
8
votes
3answers
2k views

What is an effective way of backtesting VWAP execution?

From Optimal Trading Strategies : There are two main reasons why traders execute orders using a VWAP trading strategy. First, a VWAP strategy is the trading strategy that minimizes market ...
8
votes
3answers
1k views

How to generate synthetic FX data for backtesting?

I want to generate synthetic forex data for the purpose of backtesting my trading algorithms. I have some rough ideas in mind on how to do this: Start with a curve representing a trend, then randomly ...
8
votes
3answers
6k views

Trading C++ Libraries

Are there any free c++ libraries that would have some of the functions that would be used in developing a trading strategy. For instance, calculating drawdown, Volatility Forecasting, MAE, MFE....etc. ...
8
votes
2answers
1k views

How to vet an intraday strategy

I am working on an intraday strategy using 5/10 minute bars. I am getting a decent return and sharpe on the strategy. But on close examination I see that I am making about 1 cent per trade (I haven't ...
8
votes
1answer
588 views

What tools and libraries may be used to model limit/stop systematic trading?

A lot of the tools/libraries out there seem to focus on close to close time series analysis. This is all fine but I typically do not trade close to close, I will use limit or stop orders that may or ...
7
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2answers
1k views

How to calculate the most realistic historical option prices with additional publicly available parameters

This is a follow up question of this one. My aim is to create the most realistic historical option prices possible with publicly available data. I want to do this for backtesting purposes. The ...
6
votes
4answers
932 views

How to properly evaluate backtest returns?

Do you evaluate a strategy in a backtest based on the cumulative returns generated by the strategy (i.e. looking at the cumulative returns of the trades that occur) or do you start with a certain ...
6
votes
1answer
515 views

What are the ensemble techniques to forecast returns?

It was pointed in an other question that ensemble methods can help to reduce curve fitting. What are your experience with these and which one seems the most appropriate? If I had two forecasters that ...
6
votes
1answer
1k views

What different methods of pairs selection exists? (For Pairs trading)

(I'm quite new to quant finance so I'm not sure if this is an eligible question.) I've decided I want to backtest pairs trading on the Nordic stockmarket. So I would guess there exists different ...
6
votes
2answers
344 views

Is there something like opportunistic “superstitious” trading?

This sentence in the following paper got me thinking: "Some traders [...] trade every pattern whether proven or not, expecting authentic ones to produce positive results, whilst the profits and ...
6
votes
1answer
456 views

Are shorter holding period strategies better?

Consider two statistically identical strategies (identical information ratios, sample size, ratio of transaction costs to total profit, etc.) except that one has a much shorter average holding period. ...
6
votes
1answer
169 views

Data on US bankruptcy rate vs. standard valuation ratios

Does anyone know of any research or data on US corporate bankruptcy rates as a function of standard valuation ratios, such as P/B, P/E, etc.? I'm trying to adjust the results of backtests to account ...
5
votes
5answers
2k views

What are the advantages of switching platforms/languages between strategy development and implementation?

I am interested in coding a medium frequency (trading over minutes to hours, holding for days to weeks) quantitative trading strategy and trading it with Interactive Brokers. I have seen many people ...
5
votes
4answers
2k views

How should I include the bid-ask spread as a transaction cost in a backtest?

I have two backtesting algorithms: One that uses bid and ask prices for signal generation. For example: Buy when $ask < threshold_1 $ and sell when $bid > threshold_2$. Bid and ask prices are ...
5
votes
1answer
235 views

Multiple comparison problems

I recently read a blog entry where some statistics were generated for a common technical analysis indicator. Below is the link. My question shows up close to the bottom under the name bill_080, in ...
5
votes
6answers
611 views

Encyclopedia of Statistical Tests

I am aware of: Encyclopedia of Chart Patterns, Encyclopedia of Technical Analysis. Question I'm wondering if there's something similar, but in the form of: "Encyclopedia of Statistical Backtesting ...
5
votes
1answer
662 views

Statistical significance of trading systems that use indicators with long lookbacks

Let's say we have a trading system that trades daily, holding for one day, but uses an indicator that looks back over the last 5 years. A simple example could be the percent change in price of an ...
5
votes
0answers
981 views

VaR model Unconditional Coverage Tests: Is this extension of Kupiec POF test correct?

Background: Kupiec P. in 1995, published paper "Techniques for Verifying the Accuracy of Risk Management Models" on Journal of Derivatives, v3, P73-84, it's a Unconditional Coverage Tests designe for ...
4
votes
3answers
430 views

Backtesting - can you buy/sell at open and closing prices?

In backtesting (nasdaq stocks), I make the assumption that I have the ability buy/sell each day at the opening and closing prices. Is this realistic?
4
votes
3answers
2k views

How to compute the alpha decay of a strategy?

How can one compute the alpha decay of a systematic trading strategy?
4
votes
2answers
88 views

Back-testing Value at Risk with a WML investment strategy

I'm currently taking a course in Financial Econometrics and there is a question in the lecture notes regarding back-testing of VaR which I'm have difficulty with. First of all the procedure for ...
4
votes
1answer
428 views

Bootstrapping first, then data mine?

I posted this on Cross Validated a month ago, but I didn't get any answers. Sorry for the second post! I'm wondering about the whole process of testing/data-mining for a strategy and THEN testing on ...
4
votes
1answer
525 views

Expected Shortfall (CVaR) Backtesting

I am writing my thesis on VaR and ES risk measurements and have encountered some issues with how to best test the accuracy of ES estimates. My understanding of the topic is that backtesting ES ...
4
votes
2answers
246 views

How to reactivate a risk mangement rule in an automated process

If some conditions are met (stop loss, trailing stop, take profit...) we will close ours positions (sell/buy) to avoid having more loss or to ensure profit. In an automatic trading system, it is easy ...
3
votes
2answers
468 views

Software for backtesting outside strategies (CSV transaction upload)

I've developed some software which generates sets of trades, and I'd like to backtest those trades. My software currently outputs a CSV file with details of each trade: ...
3
votes
4answers
1k views

IB TWS & API, without IB account?

I'll be starting a MFE grad program in Fall, and some of the classes have a lab that use the IB TWS & API. I'd like to play around with it for fun this summer. Unfortunately, I don't have an IB ...
3
votes
1answer
193 views

How to find optimal look back in quant trading models

I'm in the process of building a quantitative trading model, I want to improve on the way in which I decide upon a look back length for the indicators. I understand the different pros/cons for very ...
3
votes
2answers
252 views

Which indices to use for an equity vs. fixed-income portfolio simulation?

I want to backtest several basic optimization methods (e.g. MVO, "most-diversified portfolio"), and I want to do this on a basket of different asset indexes. To start with, I want to simulate a 60/40 ...