Backtest Overfitting in Financial Markets

Authors

David H. Bailey, University of California, Davis
Jonathan Borwein, University of Newcastle - Australia
Marcos Lopez de Prado, Cornell University
Amir Salehipour, University of Technology Sydney
Qiji Jim Zhu, Western Michigan UniversityFollow

Document Type

Article

Publication Date

4-1-2016

Abstract

We introduce two online backtest overfitting tools: BODT simulates the overfitting of seasonal strategies (typical of technical analysis), and TMST simulates the overfitting of econometric strategies (typical of academic journals). We show that econometric methods lend themselves to extreme levels of overfitting, casting doubt on most investment strategies published in academic journals.

WMU ScholarWorks Citation

Bailey, David H.; Borwein, Jonathan; Lopez de Prado, Marcos; Salehipour, Amir; and Zhu, Qiji Jim, "Backtest Overfitting in Financial Markets" (2016). Math Faculty Publications. 43.
https://scholarworks.wmich.edu/math_pubs/43