public/subjects/ai/backtesting-sp500/audit

Backtesting on the SP500 - audit

Preliminary

Does the structure of the project is as below ?

project
│   README.md
│   environment.yml
│
└───data
│   │   sp500.csv
│   |   prices.csv
│
└───notebook
│   │   analysis.ipynb
|
|───scripts
|   │   memory_reducer.py
|   │   preprocessing.py
|   │   create_signal.py
|   |   backtester.py
│   |   main.py
│
└───results
    │   plots
    │   results.txt
    │   outliers.txt

Does the readme file contain a description of the project, explain how to run the code from an empty environment, give a summary of the implementation of each python file and contain a conclusion that gives the performance of the strategy?

Does the environment contain all libraries used and their versions that are necessary to run the code ?

Does the notebook contain a missing values analysis? Example: number of missing values per variables or per year

Does the notebook contain an outliers analysis?

Does the notebook contain a Histogram of average price for companies for all variables (saved the plot with the images) ? This is required only for prices.csv data.

Does the notebook describe at least 5 outliers ('ticker', 'date', price) ? To check the outliers it is simple: Search the historical stock price on Google at the given date and compare. The price may fluctuate a bit. The goal here is not to match the historical price found on Google but to detect a huge difference between the price in our data and the real historical one.

Notes:

• For all questions always check the values are sorted by date. If not the answers are wrong.
• The plots are validated only if they contain a title

Python files

1. memory_reducer.py

Do the prices data set weights less than 8MB (Mega Bytes) ?

Do the sp500 data set weights less than 0.15MB (Mega Bytes) ?

Do the data type is greater than np.float32 ? Smaller data type may alter the precision of the data.

2. preprocessing.py

The data is agregated on a monthly period and only the last element is kept

The outliers are filtered out by removing all prices bigger than 10k $ and smaller than 0.1 $

The historical return is computed using only current and past values.

The futur return is computed using only current and futur value. (Reminder: as the data is resampled monthly, computing the return is straightforward)

The outliers in the returns data is set to NaN for all returns not in the years 2008 and 2009. The filters are: return > 1 and return < -0.5.

The missing values are filled using the last value available for the company. df.fillna(method='ffill') is wrong because the previous value can be the return or price of another company.

The missing values that can't be filled using a the previous existing value are dropped.

The number of missing values is 0

Best practice:

Do not fill the last values for the futur return because the values are missing because the data set ends at a given date. Filling the previous doesn't make sense. It makes more sense to drop the row because the backtest focuses on observed data.

3. create_signal.py

The metric average_return_1y is added as a new column if the merged DataFrame. The metric is relative to a company. It is important to group the data by company first before to compute the average return over 1y. It is accepted to consider that one year is 12 consecutive rows.

The signal is added as a new column to the merged DataFrame. The signal which is boolean indicates whether, within the same month, the company is in the top 20. The top 20 corresponds to the 20 companies with the 20 highest metric within the same month. The highest metric gets the rank 1 (if rank is used the parameter ascending should be set to False).

4. backtester.py

The PnL is computed by multiplying the signal Series by the futur returns.

The return of the strategy is computed by dividing the PnL by the sum of the signal Series.

The signal used on the SP500 is the pd.Series([20,20,...,20])

The series used in the plot are the cumulative PnL. cumsum can be used

The PnL on the full historical data is smaller than 75$. If not, it means that the outliers where not corrected correctly.

Does the plot contain a title ?

Does the plot contain a legend ?

Does the plot contain a x-axis and y-axis name ?

5. main.py

The command python main.py executes the code from data imports to the backtest and save the results? It shouldn't return any error to validate the project.