Thanks to visit codestin.com
Credit goes to www.scribd.com

Scribd
Upload
245 views14 pages

Backtesting-Methods

This document discusses backtesting, which involves applying trading strategies or predictive models to historical data to evaluate their effectiveness. Backtesting has benefits like identifying strengths and weaknesses without risking capital. However, it also has limitations since results on historical data don't guarantee future performance and backtests require detailed past data. Common backtesting measures include net profit/loss, risk-adjusted returns, and volatility. Institutional investors often use backtesting to assess strategies and risks.

Uploaded by

DL Santos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
245 views14 pages

Backtesting-Methods

This document discusses backtesting, which involves applying trading strategies or predictive models to historical data to evaluate their effectiveness. Backtesting has benefits like identifying strengths and weaknesses without risking capital. However, it also has limitations since results on historical data don't guarantee future performance and backtests require detailed past data. Common backtesting measures include net profit/loss, risk-adjusted returns, and volatility. Institutional investors often use backtesting to assess strategies and risks.

Uploaded by

DL Santos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 14

BACKTESTING

METHODS
ITS BENEFITS &
LIMITATIONS by: Idda Felice S. Francisco
OUTLINE
• WHAT IS RISK MANAGEMENT &
ENTERPRISE RISK
MANAGEMENT?
• QUANTITATIVE ANALYSIS
• BACK TESTING
• BENEFITS OF BACK TESTING
• LIMITATIONS OF BACK TESTING
RISK
MANAGEMENT
process of identifying,
assessing, and controlling
threats to an organization’s
capital and revenues
ENTERPRISE RISK
MANAGEMENT

A term used in the business


world to define risk
management approaches
that companies utilize to
identify and reduce risks
that could cause them
problems.
INSURABLE NON-INSURABLE

RISK AVERSE RISK TAKING

STANDARDIZED DYNAMIC

TRADITIONAL RM VS ENTERPRISE RM
QUANTITATIVE A technique for understanding behavior that
involves mathematical and statistical modeling,
ANALYSIS measurement, and study. A particular reality is
represented numerically by quantitative analysts.
Quantitative analysis is used to assess, evaluate,
and value a financial instrument, as well as
forecast real-world events like changes in a
123-456-7890
country's gross domestic product (GDP).
www.reallygreatsite.com
BACK TESTING

Involves applying a strategy or seeks to estimate the


predictive model to historical performance of a strategy or
data to determine its accuracy model if it had been employed
during a past period
HOW BACK TESTING
WORKS?
Analysts use backtesting as a way to test and
compare various trading techniques without
risking money.

A successful backtest will show traders a


strategy that’s proven to show positive results
historically.
IMPLEMENTATION

Coded by a Simulation is run Backtest


programmer using historical facilitator will
running a data assess the
simulation on the returns
trading strategy

It is also essential that the model is tested across many different market
conditions to assess performance objectively. Variables within the model are then
tweaked for optimization against several different backtesting measures.
6
COMMON BACK
TESTING MEASURES

• Net Profit/Loss
• Return: The total return of a portfolio over a given timeframe
• Risk-Adjusted Return: The total return of a portfolio adjusted for a level of risk
• Market Exposure: The degree of exposure to different segments of the market
• Volatility: The dispersion of returns on the portfolio
WHO USES BACK TESTING?
- Backtests are usually run by institutional
investors and money managers.

- Institutional traders and investment companies


possess the human and financial capital necessary
to employ backtesting models in their trading
strategies. Additionally, with large amounts of money
on the line, institutional investors are often required
to backtest to assess risk.
BENEFITS OF
Identify the strengths and
BACK TESTING
weaknesses of the trading
strategy
Allows traders to test strategies
without using the capital

Allows investor to anticipate future Provide statistical feedback on


risks strategy

Gain confidence with their strategy


before applying it in the real world
Speeds up the learning process
LIMITATIONS OF
Look ahead bias
BACK TESTING
Limited by potential curve fitting
The need for detailed historical
data

Backtesting does not


guarantee accurate results

Backtesting Bias
THANK YOU

You might also like