Naïve Backtesting is Bogus

Naïve Backtesting is Bogus

If traders have learned anything during either 2007 – 2009 (or 1998 – 2002), it should be that the fundamentals of economics and finance are not stable: nearly every statistical measure in common use across nearly all asset classes exhibited inconsistent behavior over this period (mean, variance, volatility, covariance, correlation, cointegration, principal components, skew, kurtosis, etc.). Introductory economics informs us the root causes for these instabilities are many, ranging from business cycles to monetary policy.