Cantab Partners: The Art of Backtesting

THE ART OF BACKTESTING 26 AUGUST 2015 / DR MATTHEW KILLEYA AND CLAUS SIMON Backtesting is at the heart of systematic investment. Done correctly, and it can recreate reality closely enough to identify systematic patterns which are likely to persist in the future. Patterns discovered by a robust backtest can be exploited to generate returns. But there are many subtle pitfalls to be avoided, and this is where the best researchers earn their salt. INTRODUCTION Systematic firms combine three key pillars: data, technology and people. Historical data related to financial instruments is critical to discovering and refining hypotheses. State of…