Sunday, September 09, 2007

Has backtesting really become respectable in the investment world?

"Backtesting may be more powerful than ever."

This excerpt from an article title in CFA Magazine stunned me. When I started learning about investment management in the 1980s, backtesting totally lacked credibility. It appears that clients, marketers, and data providers are responsible for an attitude shift.

"Despite widespread skepticism about backtesting on the part of financial professionals, it has become an indispensable marketing tool because clients demand it," according to "Making the Grade? Despite lingering skepticism, backtesting may be more powerful than ever" by Christopher Wright in the July-August issue of CFA Magazine.

Another factor, said Wright, is the proliferation of enormous high quality databases from providers such as FactSet, Quantitative Analytics, and TradeStation.

What do you think about backtesting?

Sept 23. comment:
Speak of the devil!
Backtesting is a key part of the argument in "Variable Annuities: From Controversial to Mainstream Using a Two-Bucket Strategy, Part 1," Journal of Financial Planning (August 2007).

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