by Jesper Pedersen, Peter Norman Sørensen, Rasmus Fatum
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Suggested foundations for financial time series and trading research and honest backtests. Specialist prerequisites vary by paper.
Check whether a relationship can be estimated consistently over time.
Read the fitted relationship and its residuals.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Study long-run relationships without confusing them with correlation.
Check the assumptions behind reported estimates.
Reconcile signals, executions, positions and P&L.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.