How should you discount your backtest PnL?
In-sample overfitting is a drawback of any backtest-based investment strategy.
It is thus of paramount importance to have an understanding of why and how the in-sample overfitting occurs.
In this article we propose a simple framework that allows one to model and quantify in-sample PnL overfitting.
This allows us to compute the factor appropriate for discounting PnLs of in-sample investment strategies.