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The False Strategy Theorem: A Financial Application of Experimental Mathematics

, and . American Mathematical Monthly, forthcoming (2018)

Abstract

The False Strategy theorem tells us that the optimal outcome of an unknown number of historical simulations is right-unbounded — with enough trials, there is no Sharpe ratio sufficiently enough to reject the hypothesis that a strategy is false. Given the ease with which one can use a computer to explore many trials or variations of given strategy and only select the optimal variation, it follows that it is very easy to find impressive-looking strategy variations that are nothing more than false positives. This is the essence of selection bias under multiple testing.

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The False Strategy Theorem: A Financial Application of Experimental Mathematics by Marcos Lopez de Prado, David H. Bailey :: SSRN

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BibTeX key:
lopezdeprado2018false
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