What I have found in the vol space is, biases need to be back tested while in-efficiencies dont. For example, the implied var premium should be back tested yet a mis pricing in an option does not need to be backtested (SPY Ivol trading higher than QQQ). I would appreciate your take on this (from a retail perspective). P.s."Same Lazy Elf" would have made more sense! Especially after Secret Santa
Yeah, that makes a lot of sense. Biases are also known as "risk premia", they are persistent and can be tracked historically in one way or another. Inefficiencies, on the other hand, are fleeting and your ability to capture them is primarily driven by your process (models, execution etc). Shadow Moon: Who are you? Mad Sweeney: I'm a leprechaun. Shadow Moon: You're a little tall for a leprechaun. Mad Sweeney: That's a stereotype. It represents a very narrow view of the world. Shadow Moon: So you're from Ireland? Mad Sweeney: I told you I'm a leprechaun. They don't come from Moscow, Russia. Or Moscow, Idaho, for that matter.
Nice quote, American Gods is fantastic. Was going through your posts from your old account the other day, thanks for sharing some of your insights! Interesting stuff.
Al Brooks on backtesting "If you test enough ideas or enough inputs in any system, you will discover that some have worked in eight out of 10 tests and others have failed in eight out of 10. That is just the distribution of outcomes under a bell curve and has nothing to do with actual likelihood, and that is why so many traders who design great back-tested systems lose money when they trade them in real time."