A discussion paper for possible approaches to building a statistically valid backtesting framework

Arakelian, Veni; Bolesta, Karolina; Vlah Jeric, Silvija; Liu, Yiting; Osterrieder, Joerg; Potì, Valerio; Schwendner, Peter; Sutiene, Kristina; Weinberg, Abraham Itzhak

doi:10.2139/ssrn.4893677

Publication type:	Working paper – expertise – study
Title:	A discussion paper for possible approaches to building a statistically valid backtesting framework
Authors:	Arakelian, Veni Bolesta, Karolina Vlah Jeric, Silvija Liu, Yiting Osterrieder, Joerg Potì, Valerio Schwendner, Peter Sutiene, Kristina Weinberg, Abraham Itzhak
et. al:	No
DOI:	10.2139/ssrn.4893677
Extent:	32
Issue Date:	17-Jul-2024
Publisher / Ed. Institution:	SSRN
Language:	English
Subjects:	Data snooping; Evaluation bias; e-value; Overfitting; p-hacking
Subject (DDC):	332: Financial economics
Abstract:	This paper explores potential methodologies for constructing a backtesting framework for financial institutions that is statistically valid. Although backtesting is an indispensable instrument for ensuring regulatory compliance and risk management, existing practices in the industry have certain deficiencies that compromise their credibility. Commencing with an examination of prevailing industry methodologies of backtesting, we underscore their deficiencies. Following this, the theoretical foundations of statistical validity are elucidated, and the constraints of present methodologies are deliberated. Following this, we present several alternatives for constructing a statistically valid backtesting framework, assessing their prospective advantages and disadvantages. In summary, we provide suggestions for the execution of a statistically valid backtesting framework as well as potential avenues for future investigation.
URI:	https://digitalcollection.zhaw.ch/handle/11475/31211
License (according to publishing contract):	Licence according to publishing contract
Departement:	School of Management and Law
Organisational Unit:	Institute of Wealth & Asset Management (IWA)
Appears in collections:	Publikationen School of Management and Law

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Arakelian, V., Bolesta, K., Vlah Jeric, S., Liu, Y., Osterrieder, J., Potì, V., Schwendner, P., Sutiene, K., & Weinberg, A. I. (2024). A discussion paper for possible approaches to building a statistically valid backtesting framework. SSRN. https://doi.org/10.2139/ssrn.4893677

Arakelian, V. et al. (2024) A discussion paper for possible approaches to building a statistically valid backtesting framework. SSRN. Available at: https://doi.org/10.2139/ssrn.4893677.

V. Arakelian et al., “A discussion paper for possible approaches to building a statistically valid backtesting framework,” SSRN, Jul. 2024. doi: 10.2139/ssrn.4893677.

ARAKELIAN, Veni, Karolina BOLESTA, Silvija VLAH JERIC, Yiting LIU, Joerg OSTERRIEDER, Valerio POTÌ, Peter SCHWENDNER, Kristina SUTIENE und Abraham Itzhak WEINBERG, 2024. A discussion paper for possible approaches to building a statistically valid backtesting framework. SSRN

Arakelian, Veni, Karolina Bolesta, Silvija Vlah Jeric, Yiting Liu, Joerg Osterrieder, Valerio Potì, Peter Schwendner, Kristina Sutiene, and Abraham Itzhak Weinberg. 2024. “A Discussion Paper for Possible Approaches to Building a Statistically Valid Backtesting Framework.” SSRN. https://doi.org/10.2139/ssrn.4893677.

Arakelian, Veni, et al. A Discussion Paper for Possible Approaches to Building a Statistically Valid Backtesting Framework. SSRN, 17 July 2024, https://doi.org/10.2139/ssrn.4893677.