Backtests

Backtests

Kyle Campbell, Jeff Enos, Daniel Gerlanc and David Kane

Introduction

The backtest package provides facilities for exploring

portfolio-based conjectures about financial instruments

(stocks, bonds, swaps, options, et cetera).

For example, consider a claim that stocks for which

analysts are raising their earnings estimates perform

better than stocks for which analysts are lowering estimates.

We want to examine if, on average, stocks

with raised estimates have higher future returns than

stocks with lowered estimates and whether this is

true over various time horizons and across different

categories of stocks. Colloquially, “backtest” is the

term used in finance for such tests.

Background

To demonstrate the capabilities of the backtest package

we will consider a series of examples based on a

single real-world data set. StarMine1 is a San Fransisco

research company which creates quantitative

equity models for stock selection. According to the

company:

StarMine Indicator is a 1-100 percentile ranking

of stocks that is predictive of future analyst

revisions. StarMine Indicator improves

upon basic earnings revisions models by:

• Explicitly considering management

guidance.

• Incorporating SmartEstimates,

StarMine’s superior estimates constructed

by putting more weight on the

most accurate analysts.

• Using a longer-term (forward 12-month)

forecast horizon (in addition to the current

quarter).

StarMine Indicator is positively correlated to

future stock price movements. Top-decile

stocks have annually outperformed bottomdecile

stocks by 27 percentage points over the

past ten years across all global regions.

These ranks and other attributes of stocks are in

the starmine data frame, available as part of the

backtest package.

> data(starmine)

> names(starmine)

[1] "date"

[2] "id"

[3] "symbol"

[4] "name"

[5] "country"

[6] "sector"

[7] "sec"

[8] "ind"

[9] "size"

[10] "smi"

[11] "liq"

[12] "ret.0.1.m"

[13] "ret.0.6.m"

[14] "ret.1.0.m"

[15] "ret.6.0.m"

[16] "ret.12.0.m"

[17] "mn.dollar.volume.20.d"

[18] "md.dollar.volume.120.d"

[19] "cap.usd"

[20] "cap"

[21] "sales"

[22] "net.income"

[23] "common.equity"

starmine contains selected attributes such as sector,

market capitalisation, country, and various measures

of return for a universe of approximately 6,000

securities. The data is on a monthly frequency from

January, 1995 through November, 1995. The number

of observations varies over time from a low of 4,528

in February to a high of 5,194 in November.

date count

1995-01-31 4593

1995-02-28 4528

1995-03-31 4569

1995-04-30 4708

1995-05-31 4724

1995-06-30 4748

1995-07-31 4878

1995-08-31 5092

1995-09-30 5185

1995-10-31 5109

1995-11-30 5194

The smi column contains the StarMine Indicator

score for each security and date if available. Here is

a sample of rows and columns from the data frame:

date name ret.0.1.m ret.0.6.m smi

1995-01-31 Lojack Corp 0.09 0.8 96

1995-02-28 Raymond Corp 0.05

...