Evaluating equity curves
Well, the reasoning went like this...since I can instantly look at a equity curve and say 'hey that's a nice steady upward slope' as opposed to "wow that's a jaggy one with lots of drawdowns", I thought to apply some sort of maths to turn this gestalt into a number that could be taken along with the final balance as a measure of fitness, thus the applying of splines. Now that you mention it however, there are probably better ways of evaluating these strategies that aren't 'graphical' in nature.
On Mon, Oct 12, 2009 at 6:45 AM, Robert Sams <robert at sanctumfi.com> wrote:
Quite right, Ralph. More precisely: any series of cumulative returns plotted against time on a 2d chart is, *by definition*, an equity curve. Aleks, I'm not sure you're after. To me, the return series of a trading strategy isn't 'evaluated' per se, it's evaluated with respect to some specific questions or conjectures you have regarding it. Articulating this is logically prior to choosing the appropriate mathematical technique. If you can be more specific, we might be able to point you in the right direction. Robert
-----Original Message----- From: r-sig-finance-bounces at stat.math.ethz.ch [mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of R. Vince Sent: 12 October 2009 02:06 To: Brian G. Peterson; Aleks Clark Cc: r-sig-finance at stat.math.ethz.ch Subject: Re: [R-SIG-Finance] Evaluating equity curves Brian, Isn't any stream of cumulative returns, de facto, an equity curve? Or am I misunderstanding this? Thanks, Ralph Vince ----- Original Message ----- From: "Brian G. Peterson" <brian at braverock.com> To: "Aleks Clark" <aleks.clark at gmail.com> Cc: <r-sig-finance at stat.math.ethz.ch> Sent: Sunday, October 11, 2009 8:46 PM Subject: Re: [R-SIG-Finance] Evaluating equity curves
Aleks Clark wrote:
As part of a project I'm working on that uses genetic algorithms to optimize trading parameters, I find myself seeking a way
to evaluate
the equity curve that results from a given set of trading rules. It seems to be an obvious area of research, so I was wondering what's available in R-land or just in the world of finance in
general. I've
poked around with splines as a way to express how 'nice' an equity curve is (steady upward rise as opposed to a "jagged" line), but I feel that there are probably better ways to do things...
Having worked both in quantitative trading and in more
traditional asset
management roles, I've never quite understood the
artificial distinction
between "equity curves" and any other kind of returns. ?In
my experience,
all the usual performance and risk analysis tools (amply
provided for in
R) as well as attribution (e.g. Bacon, much of which is
implemented in
fPortfolio) are equally applicable to trading strategies as
they are to
more traditional investment. ?Also see Pat Burns' paper on
evaluatinfg
trading strategies for additional ideas. Regards, ? - Brian
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Aleks Clark