ARP - Backtesting
Back-testing applies the strategy to historic data and assesses how the strategy would have performed in the past. There are a number of challenges that need to be addresses and asset managers need a framework in place to assess these results.
In this memo we discuss:
- The challenges of overfitting vs underfitting biases in strategy development
- A framework to assess back-testing results including that back-testing does not equal past performance, detecting statistical overfitting bias, assessing underlying assumptions, back-testing time series and back-testing results vs actual performance
- Key questions for investors to ask during due diligence processes
