Systematic Testing of Systematic Trading Strategies

24 Pages Posted: 1 Mar 2018 Last revised: 16 Mar 2018

See all articles by Kovlin Perumal

Kovlin Perumal

University of Cape Town

Emlyn James Flint

Legae Peresec; University of Pretoria

Date Written: March 1, 2018

Abstract

Systematic trading is a method that is currently extremely popular in the investment world. The testing of systematic trading rules is usually done through backtesting and is at high risk of spurious accuracy as a result of the data-mining bias (DMB) present from testing multiple rules concurrently over the same history. The eradication of this DMB with the use of statistical methodologies is currently a relevant topic in investment research, illustrated by papers written by Chordia et al. (2017), Harvey and Liu (2014), Novy-Marx (2016) and Peterson (2015). This study collectively reviews the various statistical methodologies in place to test multiple systematic trading strategies and implements these methodologies under simulation with known artificial trading rules in order to critically compare and evaluate them.

Keywords: Data-Mining Bias, Systematic Trading, Backtesting, Multiple Hypothesis Testing, False Discovery Rate, Family-Wise Error Rate, White's Reality Check, Monte Carlo Permutation

JEL Classification: C01, C02, C12, C15, C20, C3, C52, C53, C63, G00, G11, B41

Suggested Citation

Perumal, Kovlin and Flint, Emlyn James, Systematic Testing of Systematic Trading Strategies (March 1, 2018). Available at SSRN: https://ssrn.com/abstract=3132229 or http://dx.doi.org/10.2139/ssrn.3132229

Kovlin Perumal

University of Cape Town ( email )

3rd Floor, leslie Commerce Building
Engineering Mall, Upper Campus
Cape Town, Western Cape 8000
South Africa

Emlyn James Flint (Contact Author)

Legae Peresec ( email )

15 Cavendish Street
Claremont
Cape Town, Western Cape 7700
South Africa
27117227556 (Phone)

HOME PAGE: http://www.peregrine.co.za

University of Pretoria ( email )

Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

HOME PAGE: http://www.up.ac.za/mathematics-and-applied-mathematics

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