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Posts: 1
Joined: December 4th, 2018, 8:38 am

Out of sample selection

December 4th, 2018, 8:51 am

Hi everyone,

First  post so please be gentile.

I have created a simulation for a number of stocks.  I do all of my testing in-sample and rolling forward a little out of sample (to obtain the performance statistics). I move this window through time to create a performance time-series for each stock I look at  I have noticed that when I stick together the out-of-sample results a few stocks are very consistently under performing through the entire back test period. 

My question is: I don't want to introduce any bias into my simulation by selecting stocks from the out-of-sample window instead of the in-sample window, however why would I include these very poorly performing stocks if they have not ever performed out of sample?  My assumption being that this trend will continue.  I could exclude these stocks and  back test on a regular basis to see if the performance changes?

Any views on this would be much appreciated.

Thanks for any help 
 
User avatar
ppauper
Posts: 69355
Joined: November 15th, 2001, 1:29 pm

Re: Out of sample selection

December 4th, 2018, 9:02 am

If you think those stocks are going to continue to underperform consistently, then you may have found free money.
Short the underperformers as part of a long-short strategy

If you buy stocks that are performing well with the hope that they will continue to perform well, that's price-momentum

On the opposite side of the argument, there's a strategy, Dogs of the Dow, where one buys the stocks with the worst dividend yield (which are therefore underpriced according to that metric)
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