by Dragos Gorduza, Jaeyoun Ahn, Seonho Park
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Suggested foundations for trading research and honest backtests and portfolio construction. Specialist prerequisites vary by paper.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Understand the covariance structure of portfolio risk.
Read objectives, constraints and optimality conditions.
Reconcile signals, executions, positions and P&L.
Include the costs that can erase a paper strategy.
Construct allocations and examine sensitivity to estimated inputs.
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.