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I'm working on a simple stock scoring model consisiting of 3 factors:

1.market cap

2.liquidity of the stock

3.the value at risk

we defined 3 intervals for each factor and we assigned the intervals to scores (1 or 2 or 3)

the final rating is the following:

Score=25% marketcapscore +25% liquidityscore+ 50% varscore

So, how can i back test my scorig model ?

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  • $\begingroup$ These questions might help: How are you planning to use the score? Buy top 10%, short bottom 10%? When do you close the position - 1 week, 6 months, 1 year? $\endgroup$ – Magic is in the chain Oct 21 at 22:33
  • $\begingroup$ First of all,thank you for your interest.While i'm not in a decision making position, i would say they would short bottom 10% in 1 year. $\endgroup$ – DeeTee Oct 21 at 22:59
  • $\begingroup$ When you say liquidity of the stock, are you referring to the volume of the stock being traded (how easy it is to get in and out of the position) or various liquidity statistics based on company financials? $\endgroup$ – Jason p Oct 22 at 19:06
  • $\begingroup$ What is the idea behind this scoring system? Is it that smaller cap, lower liquidity, lower VaR stocks have higher long term returns? Or is it used in a different way? (eg. to select stock that are sufficient big, liquid and safe to be worth actively trading with the help of some other model). $\endgroup$ – Alex C Oct 22 at 19:14
  • $\begingroup$ Hi Jason p, the liquidity score refers the the yearly averge volume of the stock being traded and the nombre of trading days during a year $\endgroup$ – DeeTee Oct 22 at 20:38
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If you have historical values for market cap, liquidity and value of risk then you can backtest by simply using a rolling window.

If there is something in particular you are struggling with, consider editing your question.

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    $\begingroup$ Thank you, never used rolling window on backtesting. i'm going to look into documentation. $\endgroup$ – DeeTee Oct 22 at 20:43

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