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|Subject: Re: Blending at a Whole New Level||Date: 8/5/2008 1:17 PM|
|Author: StevnFool||Number: 211756 of 251793|
In an earlier post, you said:
The bull signals have a lookback of six years of data. The bear signals have a lookback of three years of data. I found these to be more or less optimal. Using all the history, however, does not result in something significantly different than what I've posted. The lookback length, IOW, is not that important.
This is partly due to the advantage gained from re-selecting screens at the indicators transition points. I have not yet been able to arrive at a good explanation of why this improves on returns so much, but it most definitely does.
If using all of the data for selecting screens for you bull and bear blends, one would expect that as time goes on, the results would converge towards "the best blends" and that the timing of the re-selecting process should matter less and less. You have however found that the timing matters a great deal.
Can you confirm that the improved results of re-selecting screens at transition points were all achieved using the shorter lookbacks of 6 and 3 years respectively?
Would you expect that in this case using all history would actually harm the backtested result?
In general, I am more comfortable with using more history for screen selection (i.e. longer lookback), and when you said, "The lookback length, IOW, is not that important.", I was planning to use the maximum lookback, but what you are showing now may suggest that a shorter lookback is better. I would like your comments on this.
My own opinion is that I'd still choose the one on the right despite the lower Sharpe. Partly I would do this due to the pratical implications of the reduced rebalance points, but also because I don't see the UI getting hurt by the reduced trading. Plus, when I compare the yearly returns I don't see something massively different. Your thoughts? Can Sharpe alone decide it for you?
In general for evaluating backtests, I have tended to stick with Sharpe, but I think once you introduce timing elements or have times when you are in cash, the Sharpe Ratio may no longer be best. Something like CAGR/UI or (CAGR - rfr)/UI is probably better. I'm not sure to what extent we would call this whole blending process "timing", but I would tend to agree with you that UI probably tells you more than GSD and CAGR and UI probably tell you more than Sharpe.
Another thought I have had on this whole process. When I first suggested Sharpe/GSD last november, the idea was to still find screens or blends with good Sharpe Ratios, but to have GSD's at the lower end of the range. I think this is very prudent in bear times when a high GSD really bites. In bull times, GSD can in fact be our friend which would make it logical that Sharpe rather than Sharpe/GSD may be a better screen selection filter - i.e. the bull / bear indicator causes us to switch between less / more conservative screens.
I wonder for assessing the best strategy (I'm not talking about a screen selection filter here) would somthing like the Sortino Ratio be better than Sharpe as I believe it is not symmetrical in how looks at volatility.
Let me share a table that compares the two periods -- the ones on the left stop on July 19, 2008 while the others end last November. The result for 1999 for the Sharpe/GSD makes me very wary. Would you keep using the method after experiencing such a massive year of under-performance? Personally, I'm inclined to think not.
This has always been a bit of a worry for me. I believe Treynor/GSD is similar Sharpe/GSD in relation to 1999 and I often wondered if I would stick it if we have a 1999 repeat. The place to be then was momentum. I would think Sharpe with a shorter lookback would have found plenty of momentum to be in for 1999.
On a related note: If there was sufficient interest, I would think it feasible for a project to be done as a joint effort where a tool could be made available to facilitate finding the new blend components at each transition point. I'm not offering to do it on my own, but I am willing to assist if there are some ready to participate. In fact, I'm already working toward this goal... we'll see where it leads.
I love the idea, but I would be afraid to commit time to this as a find it hard to do all the things I want to do each day as it is. One challenge I see is that for most of us, daily backtest results are only available through the GTR1 backtester which typically has a backtest end date somewhere between 4 months and 16 months in the past. this obviously would be no use to select screens in real time at a transition point. Somewhat better is Jamie's monthly backtester, but it can be several months out of data too. It looks like there are some considerable challenges here to do this in rela time.
Thanks again for all your work in this area. I certainly think this is a Whole New Level for Blend selection.
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