Design and backtest a trading strategy
Overview
This question evaluates a candidate's ability to design and rigorously evaluate a minute-level mean-reversion trading strategy, encompassing quantitative finance competencies such as signal construction, risk controls, position sizing, transaction-cost modeling, reproducible backtesting, and statistical validation; it belongs to the Analytics & Experimentation category within financial time-series and backtesting. It is commonly asked because it tests both practical implementation skills (reproducible backtests and walk-forward validation) and conceptual understanding (overfitting, data-snooping, and statistical significance testing), requiring a mix of practical application and conceptual statistical reasoning.
Minute-Level Mean-Reversion Strategy: Design, Backtest, Validation, and Significance
Context
You are given minute-level OHLCV data (open, high, low, close, volume) for a single equity over 180 regular trading days. Assume the data are split-adjusted and cover regular trading hours (no overnight trading).
Task
Design and implement a simple mean-reversion strategy and evaluate it rigorously.
-
Specify the complete strategy specification:
- Entry/exit rules based on a mean-reversion signal.
- Risk controls (e.g., time stop, stop-loss, daily stop, position caps, no-trade windows).
- Position sizing (e.g., volatility targeting) with explicit formulas/parameters.
- Transaction costs and slippage model.
-
Implement a reproducible backtest that outputs at minimum:
- Total and per-day PnL, win rate, average trade PnL, max drawdown, realized volatility, Sharpe ratio, and turnover.
- Perform out-of-sample validation using a hold-out split or walk-forward (rolling) validation. If you tune parameters, do so only on in-sample windows and freeze them for the test windows.
- Discuss overfitting risks and apply a suitable statistical test (e.g., bootstrap-based White’s Reality Check or similar) to assess whether performance is statistically significant given data-snooping.
Deliver a clear, step-by-step solution with code or pseudocode, including assumptions and guardrails to avoid look-ahead and survivorship biases.
Solution
Login required