by John Morgan, Shimon Kogan
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Suggested foundations for asset pricing and factor research and trading research and honest backtests. Specialist prerequisites vary by paper.
Interpret exposures, residuals and uncertainty in fitted coefficients.
Work with returns and recognise their empirical limitations.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Connect factor definitions to portfolio construction.
Distinguish exposure estimation from tests of expected returns.
Reconcile signals, executions, positions and P&L.
Connect diversification, common risk factors, investor views, and the properties of a risk measure.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.