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Determining Optimal Trading Rules without Backtesting

Portfolio Management 2014-09-30 v2 Mathematical Finance

Abstract

Calibrating a trading rule using a historical simulation (also called backtest) contributes to backtest overfitting, which in turn leads to underperformance. In this paper we propose a procedure for determining the optimal trading rule (OTR) without running alternative model configurations through a backtest engine. We present empirical evidence of the existence of such optimal solutions for the case of prices following a discrete Ornstein-Uhlenbeck process, and show how they can be computed numerically. Although we do not derive a closed-form solution for the calculation of OTRs, we conjecture its existence on the basis of the empirical evidence presented.

Keywords

Cite

@article{arxiv.1408.1159,
  title  = {Determining Optimal Trading Rules without Backtesting},
  author = {Peter P. Carr and Marcos Lopez de Prado},
  journal= {arXiv preprint arXiv:1408.1159},
  year   = {2014}
}

Comments

Working paper

R2 v1 2026-06-22T05:21:24.077Z