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Break Your Strategy: How To Stress-Test Your Quantitative Models

Mar. 10, 2020 2:11 AM ET


  • Suggests that quantitative investors improve the robustness of their systems by subjecting them to stress tests.
  • Identifies ways to produce variations on an investment or trading strategy as the basis for further testing.
  • Provides concrete examples of stress-testing and the results of applying these tests to actual multifactor systems.
  • I do much more than just articles at The Stock Evaluator: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Building and Breaking Models

If you’re a quantitative investor or trader, you build a model and then backtest it to see if it has worked in the past; if you’re like most people, you try to improve your model with repeated backtests. You’re operating under the assumption that there will be at least some modest resemblance between what has worked in the past and what will work in the future. (If you didn’t assume that, you wouldn’t backtest at all.)

But what few backtesters do after building their model is to try to break it by subjecting it to stress tests. A truly robust model should withstand every moderate attempt to break it. Only then should it be put into practice.

This article will outline some techniques for stress-testing quantitative models. I use Portfolio123 to build and backtest my models. If you model using a different platform, most of what follows won’t apply, but I’ll try to explain my techniques in language that can be adapted to other platforms.

General Guidelines for Stress Tests

Each model that one designs on Portfolio123 essentially consists of a ranking system and a universe to which it applies. One can add a lot of complexity to the model, but those are perhaps the two most important foundations. The universe consists of a root universe and then incorporates a variety of screening rules to eliminate stocks with low liquidity, high risk, low growth, high price, or whatever else you want to put in there. In order to do these tests, you must put as many of your screening and buy rules into your universe as you can. Each model then buys the top-ranked stocks according to its ranking system and sells them when their ranking falls to a certain point, buying new stocks to replace them. The number of holdings and the sell rules are some of

My marketplace service, The Stock Evaluator, comprehensively ranks close to 5,000 stocks weekly based on a sophisticated multi-factor system with deep roots in accounting and valuation methods. It has a terrific out-of-sample record: over the 21 months since the service began, high-ranked stocks have consistently outperformed the market while low-ranked stocks have massively underperformed it.

This article was written by

Yuval Taylor profile picture

Yuval Taylor is an author and analyst with 8 years of experience using multifactor ranking systems to buy and sell stocks. He focuses on microcaps and emphasizes evaluating every stock from as many angles as possible via algorithm. He is the leader of the investing group The Stock Evaluator.

Features of the service include: disclosure of Yuval’s personal positions, 2 unique portfolios, a spreadsheet of nearly 10,000 stocks rated from 0 to 100 weekly, and live chat for questions. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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