by Grégoire Szymanski, Joseph Leclère, Mathieu Rosenbaum, Youssef Ouazzani Chahdi
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Suggested foundations for stochastic processes and pricing and trading research and honest backtests. Specialist prerequisites vary by paper.
Understand what it means to condition on current information.
Follow Brownian dynamics and the second-order term in Itô calculus.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Connect stochastic dynamics to no-arbitrage prices.
Translate continuous dynamics into a numerical experiment.
Reconcile signals, executions, positions and P&L.
Start in discrete time, move to Brownian motion, then read the original pricing argument and simulate it.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.