by Ari Juels, Iddo Bentov, Lorenz Breidenbach, Philip Daian, Steven Goldfeder, Tyler Kell, Xueyuan Zhao, Yunqi Li
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Suggested foundations for trading research and honest backtests and risk measurement and stress. Specialist prerequisites vary by paper.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Represent losses as a distribution rather than one forecast.
Distinguish a loss quantile from the average loss in the tail.
Reconcile signals, executions, positions and P&L.
Include the costs that can erase a paper strategy.
Compare risk estimators and their assumptions.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.
Connect diversification, common risk factors, investor views, and the properties of a risk measure.