I ran regressions using historical valuation data and now want to backtest the models I came up with.

Are there any issues with using the same historical data set for the backtest that I need to be aware of?

  • $\begingroup$ As in in-sample, out-of-sample differentiation? $\endgroup$
    – berkorbay
    Sep 16 '14 at 21:26

Yes, this is an issue. There will be datamining bias.

The best practice is to hold enough of your data out-of-sample to test your models. For example, if you have 10 years of data, use the first 5 years to come up with your models. You could then rank them from best to worst, based on whatever metric you prefer. Then use the second 5 years of data to test your models. If they have approximately the same ranking, then you should have increased confidence in using those models for future data.


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