2014/08/06 by Peter P. Carr, Carr, Peter P., Marcos Lopez de Prado +1
Economics, Econometrics and Finance · #60E #62C #91G10 #91G60 #91G70 #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Portfolio Management (q-fin.PM) #msc:60E #msc:62C #msc:91G10 #msc:91G60 #msc:91G70 #q-fin.MF #q-fin.PM
paper · pdf · doi:10.48550/arxiv.1408.1159
Working paper
arxiv created 2014/09/28 · arxiv updated 2014/09/30
Calibrating a trading rule using a historical simulation (also called backtest) contributes to backtest overfitting, which in turn leads to underperformance. In this paper we propose a procedure for determining the optimal trading rule (OTR) without running alternative model configurations through a backtest engine. We present empirical evidence of the existence of such optimal solutions for the case of prices following a discrete Ornstein-Uhlenbeck process, and show how they can be computed numerically. Although we do not derive a closed-form solution for the calculation of OTRs, we conjecture its existence on the basis of the empirical evidence presented.