THE ART OF BACKTESTING

26 AUGUST 2015 / DR MATTHEW KILLEYA AND CLAUS SIMON

Backtesting is at the heart of systematic investment. Done correctly, and it can recreate reality closely enough to identify systematic patterns which are likely to persist in the future. Patterns discovered by a robust backtest can be exploited to generate returns. But there are many subtle pitfalls to be avoided, and this is where the best researchers earn their salt.

INTRODUCTION

Systematic firms combine three key pillars: data, technology and people. Historical data related to financial instruments is critical to discovering and refining hypotheses. State of the art technology is essential if one is to extract meaningful information from decades and decades of such data - no serious...