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|Subject: Re: Blending at a Whole New Level||Date: 7/24/2008 1:35 PM|
|Author: elann||Number: 211471 of 251800|
In thinking more on this I believe this is a mute point now. It is quite obvious to me that the better blending method per historical backtest is the use of one blend for bullish periods and a different blend for bearish periods. Treynor/GSD works great for both, but it does not come to the top of the list for either when the market is divided in this way.
Furthermore, as I look over the screens held I see a tremendous amount of cases where the same screen is held from the bullish to the bearish. That is why the turnover is just 50%. That is a whole lot lower than I expected.
This flashes my curve fitting warning light.
Let's say you optimize a blend selection process without segmenting between bull and bear markets, as you did earlier. You find that a blend optimized on Sharpe/GSD works best, or a close second best to Treynor/GSD.
Then you segment the test period into bull/bear periods and allow a different measure for blend selection in each sub-period. You find that the measures selected in each sub-period are different, but they select very similar sets of screens. What happens here in effect that the number of degrees of freedom has been increased. If the differences are small they may very easily be an artifact of curve fitting. It goes without saying that as the degrees of freedom increase the opportunities for larger excursions from the "real" result increase, and the optimal result is bound to be better than the earlier result for purely statistical reasons. In other words, curve fitting.
This is essentially the same objection I had to Jamie's attempts at screen switching about eight years ago.
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