Refining and Robust Backtesting of A Century of Profitable Industry Trends

ArXiv ID: 2412.14361 “View on arXiv”

Authors: Unknown

Abstract

We revisit the long-only trend-following strategy presented in A Century of Profitable Industry Trends by Zarattini and Antonacci, which achieved exceptional historical performance with an 18.2% annualized return and a Sharpe Ratio of 1.39. While the results outperformed benchmarks, practical implementation raises concerns about robustness and evolving market conditions. This study explores modifications addressing reliance on T-bills, alternative fallback allocations, and industry exclusions. Despite attempts to enhance adaptability through momentum signals, parameter optimization, and Walk-Forward Analysis, results reveal persistent challenges. The results highlight challenges in adapting historical strategies to modern markets and offer insights for future trend-following frameworks.

Keywords: Trend Following, Momentum Strategy, Walk-Forward Analysis, Risk Management, Portfolio Optimization

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 8.0/10
• Quadrant: Holy Grail
• Why: The paper involves advanced mathematical modeling with formal definitions of indicators (Keltner/Donchian channels, volatility scaling) and empirical testing using multiple data splits, point-in-time compliance, and robust validation techniques like Walk-Forward Analysis.

  flowchart TD
    Goal["Research Goal: Test Robustness of<br>100-Year Industry Trend Strategy"] --> Inputs
    subgraph Inputs ["Data Inputs"]
        I1["Historical Industry Returns"]
        I2["Treasury Bill Data"]
    end
    Inputs --> Method
    subgraph Method ["Key Methodology"]
        M1["Long-Only Trend Following"]
        M2["Walk-Forward Analysis"]
        M3["Parameter Optimization"]
    end
    Method --> Comp
    subgraph Comp ["Computational Processes"]
        C1["Simulate Strategy &<br>Calculate Metrics"]
        C2["Analyze Drawdowns<br>& Risk"]
        C3["Test Adaptations<br>excl. T-Bills"]
    end
    Comp --> Find
    subgraph Find ["Key Findings & Outcomes"]
        F1["Challenge: Declining<br>Performance in Modern Markets"]
        F2["Issue: Reliance on<br>Safe-Haven Assets"]
        F3["Outcome: Framework for<br>Future Robustness Testing"]
    end