Replication of Past Portfolio Outperformance: Dutiful Quant Spins Cautionary Tale With Resolution

28 Pages Posted: 8 Feb 2023

Date Written: February 5, 2023

Abstract

Granted, it is generally understood that using past performance as the basis for either choosing an investment alternative or for selecting a particular configuration of a given alternative poses the risk of mistaking chance outperformance for something that might endure. But if many of the alternatives and configurations don't actually have performance staying power then the greater the number under consideration, the greater the risk of settling upon a chance outperformer. And a great deal of attention needs to be paid to that. Herein a unified approach is presented (with open-sourced code) that combines in-sample and out-of-sample testing methods in such a way as to comprehensively succeed in resolving and improving the true prospects for replication of past performance. Portfolios are formed that are optimized composites of prospective investment alternatives, that by design have fully known and replicable out-of-sample performance (with statistical significance accurately assessed).

Keywords: replication, p-value, cross-validation, multiple hypotheses, FDR

JEL Classification: C120, C460, C150, C870

Suggested Citation

O'Connor, Michael Christopher, Replication of Past Portfolio Outperformance: Dutiful Quant Spins Cautionary Tale With Resolution (February 5, 2023). Available at SSRN: https://ssrn.com/abstract=4348491 or http://dx.doi.org/10.2139/ssrn.4348491

Michael Christopher O'Connor (Contact Author)

MO'C Portfolio Analytics ( email )

Shelton, WA
United States

HOME PAGE: http://www.mocpa.com

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