Impact of Dataset Selection on the Performance of Trading Strategies

Abstract

We have previously mentioned that not all models (such as CAPM) that work well for developed markets (DM, such as the U.S. and Europe) are suited to be applicable in other world parts. The following article is a short analysis that shows that investing in Emerging Markets (EM) has its peculiarities. Especially investing in Chinese equities can sometimes be complicated with its mix of mainland exchanges, Hong Kong exchange, and/or Chinese ADRs listed abroad. While all of these investment possibilities can seem the same at first glance – they are all “Chinese stocks” to an external observer, the truth is that stocks on each exchange behave differently and are sensitive to different risk factors. Therefore it’s important to understand how the performance of equity factor investing strategy can be dependent upon the selection of the dataset on which we backtest it.

Keywords: equity long short, factor allocation, factor investing, momentum, momentum in stocks, own-research, reversal, smart beta, stock picking