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Quantopian Lecture Series: Overfitting

Overfitting bias has a way of subtly creeping into your analysis, in fact, overfit backtests is one of the biggest issues in quantitative finance. In this notebook we discuss some forms of overfitting and some ways to deal with it.

The lecture will be presented at this meetup. We will be releasing a video lecture as well, watch this thread for a link.

Also in this lecture:

This is part of Quantopian’s Summer Lecture Series. We are currently developing a quant finance curriculum and will be releasing clone-able notebooks and algorithms to teach key concepts. Stay tuned for more. We are also working on a permanent home for all of our notebooks.

Credit for the notebooks goes to Evgenia 'Jenny' Nitishinskaya, and credit for the algorithms goes to David Edwards.

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2 responses

Great stuff, this paper is also relevant in this regard: http://www.ams.org/notices/201405/rnoti-p458.pdf

Disclaimer

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

It seems that you forgot to clear your position at the end of a loop in trade(stock, length) function (so money earned is calculated incorrectly).
Simple fix is this:

return money + count*stock[-1]

As a result the last plot (showing earnings for different mean reversion window lengths in 2013-2015 and 2011-2013) is completely incorrect — there are no such dramatical changes as your plot has.