Backtesting and shortfalls - survivorship bias

When backtesting trading ideas I usually focus on members of the DAX and MDAX indices, as those titles usually provide a sound liquidity and sufficient free float.

One of my systems traded (STEINHOFF) as this is (was part of the MDAX). Not surprisingly shortly after disclosed their financial problems my strategy was under water.

In March 2018 will leave the MDAX, as I don't keep a history of all Index members it turns out that this is a simplification in my backtesting approach, which is much misleading.

In March I would backtest the same strategy probably with a significant better result simply because is not longer part of the MDAX and I would not select this asset.

This is survivorship bias - so you might want to consider this in your backtests.

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