Backtesting quant strategies January 8, 2009 at 11:17 am

Felix Salmon has an excellent post today on quant strategies. As he points out, knowing whether you have something worth trading isn’t exactly easy at the moment.

When you backtest, do you backtest through the quant blow-up of 2007 and the stock-market meltdown of 2008? If so, do you really think that’s going to give you the kind of trading idea which will make money going forwards? And if not, then what do you ignore, and why do you ignore it, and what makes you think you won’t run into a third period of high volatility which will lie well outside any reasonable assumptions you might make?

Up until 2007, the problems with quant funds was that the models didn’t remotely conceive of the world as it transpired. Now, the problem with quant funds is that they can’t help but conceive of the world as it transpired.

This applies more broadly, of course. No one has any recent data on normal markets because there haven’t been any recently…

2 Responses to “Backtesting quant strategies”

  1. David,

    The same problem might surreptitiously spread beyond the obvious. I’d find it hard to justify relying on backtest results that included an extended period in which quant strategies themselves were a strong determinant of price behaviour – the 2003-07 period, for example. Unless you believe you can go back to an age of innocence, the evidence has to be viewed as irremediably tainted.

  2. Charles

    I agree completely. For the moment at least it is hard to see what a convincing test of a quant strategy would be like.