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Stock portfolio design and backtest overfitting

Bailey, David H. and Borwein, Jonathan M. and de Pardo, Lopez M. (2016) Stock portfolio design and backtest overfitting. Journal of Investment Managment . (In Press)

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Abstract

We demonstrate a computer program that designs a portfolio consisting of common securities, such as the constituents of the S&P 500 index, that achieves any desired profile via in-sample backtest optimization. Unfortunately, the program also shows that these portfolios typically perform erratically on more recent, out-of-sample data, which is symptomatic of selection bias. One implication of these results is that so-called smart beta funds, which are designed in-sample to deliver a desirable performance pro file, are likely to disappoint out-of-sample.

Item Type: Article
Subjects: UNSPECIFIED
Faculty: UNSPECIFIED
Depositing User: Mrs Naghmana Tehseen
Date Deposited: 27 Jun 2016 12:05
Last Modified: 27 Jun 2016 12:05
URI: https://docserver.carma.newcastle.edu.au/id/eprint/1704

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