by Alexander F. Wagner, Andreas Schrimpf, Andreas Ziegler, Peter S. Schmidt, Urs von Arx
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Suggested foundations for trading research and honest backtests and asset pricing and factor research. Specialist prerequisites vary by paper.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Interpret exposures, residuals and uncertainty in fitted coefficients.
Work with returns and recognise their empirical limitations.
Reconcile signals, executions, positions and P&L.
Include the costs that can erase a paper strategy.
Connect factor definitions to portfolio construction.
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.