Open AccessRandom Portfolios for Evaluating Trading Strategies
Author(s) -
Patrick J. Burns
Publication year - 2006
Publication title -
ssrn electronic journal
Language(s) - English
Resource type - Journals
ISSN - 1556-5068
DOI - 10.2139/ssrn.881735
Subject(s) - pairs trade , business , trading strategy , algorithmic trading , financial economics , actuarial science , econometrics , economics , finance , alternative trading system
Random portfolios can provide a statistical test that a trading strategy performs better than chance. Each run of the strategy is compared to a number of matching random runs that are known to have zero skill. Importantly, this type of backtest shows periods of time when the strategy works and when it doesn't. Live portfolios can be monitored in this way as well. This allows informed decisions - such as changes in leverage - to be made in real-time.
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