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Assume a daily trading strategy where each day we rebalance our portfolio weights:

  • Situation A: all constituents of our portfolio are from the same market (e.g. a portfolio of S&P 500 stocks)
  • Situation B: the portfolio consists of stocks from different markets/regions (e.g. a global portfolio with USA, EU and Asian stocks)

In Situation A, I exclude holidays when performing a backtest, reflecting the fact that orders can not be placed on such days as exchanges are closed. However, in Situation B, this is harder since holidays do not necessarily coincide between different markets (e.g. see holiday calendars of Hong Kong exchange and NYSE).

How does one treat holidays when backtesting strategies on global portfolios in Situation B?

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    $\begingroup$ To do this right, for each day and each market you will need a boolean variable which tells you whether you can trade on that day in that market or not (1 or 0). (In fact, even within a single country - the USA - there are a 1 or 2 days a year when the bond market is closed but the stock market is open. But most people frankly just omit those days to keep it simple. In a true global portfolio you cannot do this. And you also have to take into account time zone differences. It gets complicated). $\endgroup$
    – nbbo2
    Nov 22, 2021 at 16:38
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    $\begingroup$ When doing such backtests, I usually don't run the strategy as soon as there is one holiday in the universe. This way, we don't have any issue. It's also unlikely that this introduces a major bias on the alpha or on the risk. $\endgroup$
    – PC1
    Nov 24, 2021 at 5:12
  • $\begingroup$ thanks both for very informative answers! For now we will then proceed with removing from simulation all days for which at least one of the constituents can not be traded due to holidays. $\endgroup$
    – Metod Jazbec
    Nov 24, 2021 at 11:20

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