by Carlos Octavio Pérez Mendoza, Frédéric Godin, Geneviève Gauthier, Pascal François
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Suggested foundations for trading research and honest backtests and options and derivatives pricing. Specialist prerequisites vary by paper.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Build replication and risk-neutral probabilities in a tractable model.
Distinguish pricing probabilities from physical forecasts.
Reconcile signals, executions, positions and P&L.
Include the costs that can erase a paper strategy.
Connect the pricing equation, closed-form value and implied volatility.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.
Start in discrete time, move to Brownian motion, then read the original pricing argument and simulate it.