The generic formula would be: ATSvalue = (ExpectedLifetimeP&LPeak - SystemStop - ATSprice)*DiscountFactor - ExpectedLifetimeP&LPeak: calculated at minimum position size. This is basically the 1-year average P&L * anticipated number of years before system failure. - SystemStop: 5 std-dev. from mean max.DD, calculated for 1-year worth of trades. For most system that I have developed, a fast approximation of that is twice the historical max.DD Note that (ExpectedLifetimeP&LPeak - SystemStop - ATSprice) is the expected net result from purchasing then trading the system until its failure (defined by reaching a DD equal to SystemStop). - DiscountFactor: this DiscountFactor could be a set value (independent of the ATS), to account for the general fact that the future is unknown, and on average only X% of all systems live through their promises. Lower boundary is obviously 0, upper boundary probably 50%, and a realistic value could be 20%. Assuming the ATS is sold for a price equal to its value, the above formula simplifies into: ATSvalue * (1 + DiscountFactor) = (ExpectedLifetimeP&LPeak - SystemStop) * DiscountFactor hence: ATSvalue = (ExpectedLifetimeP&LPeak - SystemStop) * DiscountFactor / (1+DiscountFactor) This leaves as main variable the anticipated number of years before system failure. Two key elements that could play a role here are the # of trades in the backtest, and the time period covered by the backtest.
Congrats. Your valuation formula depends on 3 variables that are basically impossible to forecast. (The ability to above any of the 3 is in itself a major source of alpha).
For one thing, I disclosed how I do compute the SystemStop for any system - using both a detailed & precise formula, and a fast approximation of it. If you took the time to read, you would also have noticed I suggested a fixed value for the DiscountFactor, which is system independent. Try to make one useful contribution in this thread - it's Valentine day, we all need some love, and you'll be glad that you did.
All the pseudo formulas in the world doesn't help you estimate things that are mostly unforecastable. You are just putting a false sense of precision where there is none.
Wow, I wasn't expecting a full price formula, maybe just some factors based on the attributes you discussed. Congrats!
http://en.m.wikipedia.org/wiki/Heavy-tailed_distribution Thread Closed At The Request of Original Poster - Admin Joe