Escaping the backtesting illusion: An application of evolutionary finance

Two tests can help asset managers to develop more robust investment strategies: an impact test and a survival test. Both tests complement the backtest where one checks how a proposed investment strategy would have performed in the past. The impact test considers the performance of the strategy when assets under management grow (crowdedness) and it checks the impact that a growth of asset under management in competing strategies have on the proposed strategy (cross impact). The survival test considers the effect of the long-term evolution of assets under management in competition for market capital.

In the first part of Klaus Schenk-Hoppé’s talk, Shiller’s S&P 500 index and bond market data are used to study time-series momentum and relative dividend yield investment. In the second part of the talk, he considers factor investing where institutional investors’ portfolios typically contain positions in thousands of listed companies.

About the speaker

Klaus Schenk-Hoppé is Professor of Financial Economics at School of Social Sciences, University of Manchester and Adjunct professor at the Department of Finance, Norwegian School of Economics. His current research interests include financial economics, computational economics and finance, dynamic economic theory and random dynamical systems theory.

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