I came across this problem a few nights ago, while I was back testing in IDE. Here is a glimpse into the simulation environment:
Setup
I have a dollar neutral (long-short) portfolio which has 60 positions at each time. My trade universe is a subset of market with stocks that:
- Not listed on OTC,
- Have a market cap,
- Common stock and primary shares.
- In addition, their "Vol-days" volume moving average to be equal or greater than "vol_mark". I have chose 21 days and 1e+6 in this test.
I used Morningstar's "fcfy - Free Cash Flow Yield" as a factor and at each day z-score the factor and find the top and bottom quantiles (10 bins). Then stock space is constructed as 100 shares that belong in top and bottom bins.
I used opt.MaximizeAlpha() as my objective and among other constraints, I selected opt.PositionConcentration.with_equal_bounds()for bounding the each position weight. So for the total position of 60, maximum long(short) position weight should be 1/30(-1/30) or roughly 3.3%. I chose very small starting cash to simplify the investigation.
Now the problem:
When I back-test, I saw significant drop in the return on '2018-11-08'. On the day before, the portfolio has a position of (-7924) shares of 'RSLS' at $0.02. A day after, the RSLS price jumps to $1.94 and results in almost $15k loss on the portfolio. Interestingly, I could not find the 'RSLS' on research environment after '2018-11-08'.
My curiosity in raising this question is to make sure the approach in general is right and I am not missing any significant step along the way. factor that I used is just an example and not the subject of my question. The main questions are:
- Is it a bug this specific stock price?
- How do you gals/guys prevent an event like this, especially for portfolios that have short positions?
Any feedback/comment is much appreciated.
Cheers,
