How should you discount your backtest PnL?

5 February 2019

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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.

Authors

Adam Rej , Philip Seager , Jean-Philippe Bouchaud

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