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What would you consider a decent R square value of a good trading strategy.

I know R squared is not a good metric for judging trading strategies but still at an initial stage how do you decide to keep a predictor variable if r squared of the model is good but trading strategy results are poor.

More specifically , I have 2 trading models with 2 different predictive variables one have a R square of 5% and average backtesting return. The second have a R square of 1% and good backtesting returns.(I have assumed the simplest regression model for both with no parameter fitting other than the coefficients themselves.)

So, my question is

  1. which model is better?
  2. Is R squared of 5% decent value or should it be atleast 20-30%.

Please provide any other inputs regarding the metrics if you can.

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  • $\begingroup$ Hi: Keep in mind that R2 the average squared sum of the data points and their associated predictions AT a particular time and return is calculated over a period of time so, if the dependent variable in your regression model is returns, then yes, there should be a relation. If it's anything else, there may not be. In my experience, R2 can tell you something but not much. You have to do a backtest to see how effective your predictions are. $\endgroup$
    – mark leeds
    Commented Sep 12, 2019 at 9:01

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