Sun, Nov 19, 2017
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Alternative Market Briefing

Other Voices: The insidious threat of data mining bias

Wednesday, May 24, 2017

Guest article from Kris Longmore, Founder and Head of Quantitative Research at Quantify:

In the context of systematic trading research, data mining bias refers to the risk of attributing significance to a result that was in fact due to chance. I refer to it as an "insidious threat" because it creeps into the research process naturally and quietly and can have disastrous results if not accounted for. In the extreme, this leads to the decision to trade a losing strategy, but at the very least, neglecting data mining bias leads to inflated and unrealistic performance expectations.

Data mining bias arises due to two fundamental characteristics of trading system research and development. The first is randomness, and the second is sequential comparison, which is the search for the 'best' parameter set.

In any series of trades arising from a given system, the realised performance will have an element of randomness as well as an element due to the inherent edge of the system. If we examine only a single system variant, we have no way of knowing the ratio of the two components. The random component is equally likely to be positive or negative, and in some cases, may be extreme. In any event, this random component results in variation around the long-term expectation of the system.

Sequential comparison and selection leads to the system variant with the best performance in the historical simulation being selected. Consider this selection process in the c......................

To view our full article Click here

Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Middle East - Saudi-Iran war would create this domino effect of global disaster, Saudi billionaires said to move funds from region to escape asset freeze[more]

    Saudi-Iran war would create this domino effect of global disaster From Events appear to be spinning out of control in the Middle East, and the threat a Saudi-Iranian war is looking increasingly credible. Make no mistake, an out and out conflict between the two nations would be

  2. Paradise Papers - Robert Mercer's effort to avoid taxes appears in Paradise Papers, Tycoon made $41m from 'people's fund', Oxford and Cambridge 'investing millions of pounds offshore', Paradise Papers reveal[more]

    Robert Mercer's effort to avoid taxes appears in Paradise Papers From The Guardian has reported that conservative billionaire and Trump backer Robert Mercer "appears as a director of eight Bermuda companies in the Paradise Papers," the trove of documents reviewed by the

  3. Wall Street hedge fund veteran hits highs with copycat tactics[more]

    From A Wall Street veteran who has made big returns for wealthy clients by piggybacking on the strategies of well-known hedge funds is taking his novel approach to stock-picking to institutional clients. Dixon Boardman, chief executive of $2.5bn fund of hedge funds Optima Fund Ma

  4. Launches - Eaton Vance, Oaktree to launch diversified credit NextShares fund, FIM launches Nordic AI-powered fund[more]

    Eaton Vance, Oaktree to launch diversified credit NextShares fund Eaton Vance Management, a subsidiary of Eaton Vance Corp., announced the expected mid-November launch of Eaton Vance Oaktree Diversified Credit NextShares, a new Eaton Vance-sponsored exchange-traded managed fund. Eaton Va

  5. Outlook - Gundlach's stock market warning comes true[more]

    From Jeffrey Gundlach has been warning something's got to give. Based on the past two days, looks like we have our answer. Stocks fell around the world a second day and high-yield bonds headed for a fourth straight loss, resuming a historic correlation that the hedge fund manager on W