98 CHAPTER ◆ 9 Research Quantitative Methods
9.1. Benchmarking Quantitative Methods
Benchmarking is a comparative process. To be specific, over the course of this step,
researchers compare and benchmark the following:- Trade selection algorithms
(a) Valuation and forecasting calculations
(b) Optimization routines
(c) Entry characteristics
(i) Signal defi nition (position rationale)
(ii) Quantity
(iii) Order type
(iv) Entry price
(d) Exit characteristics
(i) Profi t targets
(ii) Trailing stops
(iii) Time till exit
(iv) Rebalancing exit - Trade execution and trade cost analysis calculations
- Cash management procedures
- Risk algorithms
(a) Risk calculations
(b) Hedging algorithms
(c) Drawdown procedures
(d) Cash and borrowing procedures
(e) Credit risk exposures - Performance monitoring and reporting
(a) Performance metrics
(b) Simple metric calculations
(c) Shutdown triggers.
The drive to uncover best practices will reveal what really works, including the conditions
under which it works. Successful teams work from the general to the specific, understanding
the entire strategy prior to modeling the pieces. Most complex trades can be broken down
into simple concepts that should be understood before research starts.
In cases where many practices exist, researchers must be able to recognize the best
practice, the one that will, either on its own, in collaboration with other methods, or
through extension of the theory with proprietary calculations, produce a better, more stable
trading/investment system. According to Robert C. Camp the best practice is one where:^2● Performance is clearly superior. For example, a comparison of several forecasting
methods may indicate that one clearly proves better than others.
● The quantified opportunity is large. For example, one strategy for exiting positions
may prove to be more profitable than others.