Performance
Testing
We subject the returns process to
a detailed battery of statistical tests designed
to assess the model’s performance.
This will confirm whether or not the
model has produced significant abnormal
(positive alpha) returns, and that it has
subsequently broken down (rather than simply
having extended runs of good and bad luck).
This process will often give indications
as to the nature of the model failure and the
further steps most likely to lead to a
successful restoration.
Model
Adequacy
We
examine the model in detail from a theoretical
standpoint and identify potential areas of
weakness where theoretical concepts have been
inappropriate applied or poorly implemented.
Peer
Review
In
some circumstances we are able to conduct
confidential review the model’s performance
against comparable models used by other
investment management firms.
Market
Behavior
We
examine the empirical behavior of markets traded
by the model pre- and post- breakdown for
evidence of important effects that the model
fails to capture of represent appropriately, or
the regime shifts in the market that change the
fundamental pattern of behavior in a way which
the model is unable to adapt to. These
effects might include:
