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Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz ( toddk63@yahoo )

Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz ( toddk63@yahoo.com ).

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Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz ( toddk63@yahoo )

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  1. Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz (toddk63@yahoo.com) Survivor Bias or Survivorship Bias is basically the overly optimistic effect one sees when the current stocks in an index are back-tested to a long trading strategy going back several years. The effect can be explained by the fact that the current membership of the index that one is back testing will not include stocks that are now delisted. Thus the system tested will not include any trades of stocks that may have existed in the past ,but are now bankrupt. This erroneously skews the system results since these potential bad trades were never even an option for the tested system. The intent of this study is to compare the “Buy and Hold” performance of the NASDAQ 100 Index (!NDX) which does include the effect of those failed companies, with a custom index consisting of the current 100 stocks in the NASDAQ 100 (as of June 2008). This custom index is an “equal weighted” index unlike the !NDX to which it is being compared. The effect of this discrepancy is small, however, for the purpose for which it is being used. A chart comparing the Weighted (!NDX) and Un-weighted (QQEW) Index is included in if you wish to see the correlation.

  2. Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz (toddk63@yahoo.com) All charts presented are normalized to have a starting value of 100 for easy comparison of percent changes over time. There are two possible ways to calculate a custom index. One method cumulatively sums the daily percent changes resulting in an “un-compounded” result. The second method multiplies the previous days index value by the recent daily percent change, resulting in a “compounded” result. This second “compounded” method is the one required to reproduce the actual !NDX or QQQQ. Changing the Y-axis of a “compounded” chart to a logarithmic scale produces a result very close to a chart produced using the sum or un-compounded method. The first chart demonstrates that the weighted NDX100 (!NDX or QQQQ) is reasonably equal to an equal-weighted NDX100 (QQEW) for the purposes of this study. As I can only generate an equal weighted custom index, accepting this assumption allows us to use the !NDX (or QQQQ) as a proxy for the QQEW with much greater historical data than the QQEW could give us.

  3. Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz (toddk63@yahoo.com) The second chart is a normal scale, compounded comparison of the !NDX against my custom NDX100-2008 (containing the current 100 stocks in the index). Survivor bias is clearly shown over the 10 year period presented. The custom NDX100-2008 has appreciated more than 10 times greater than the actual !NDX in that period. Also notice that the two indexes track fairly close until mid-2000, when the actual !NDX drops significantly while the NDX100-2008 is generally flat. At the end of the dotcom bust in October of 2002, the actual !NDX stood at around 100 where the NDX100-2008 was at nearly 600. Following this, the NDX100-2008 had a significant advantage over the !NDX with its starting point of 600 and the power of compounding, rocketing way ahead of the !NDX to over 3100.

  4. Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz (toddk63@yahoo.com) The third chart is a logarithmic scale of the previous chart. This essentially is a visual trick to strip away the benefit of compounding as one would do when viewing any stock chart that had a meteoric rise in a short time period. The two indexes now look very similar except for the dotcom bust period between mid-2000 and late 2002. Only a slight amount of survivor bias can be seen in the two up legs outside of the dotcom bust period.

  5. Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz (toddk63@yahoo.com) The fourth and final chart is of the same two indexes, !NDX and NDX100-2008, except the two indexes were calculated using the summation “un-compounded” method. This chart looks very similar to the previous log scale chart, showing the same effect of survivor bias being most prevalent during the steep decline of the dotcom bust period.

  6. Survivor Bias Study of NASDAQ 100 By: Todd Kellenbenz (toddk63@yahoo.com) Conclusions: Doing this study has helped me understand survivor bias in an index, in particular the NASDAQ 100. The greatest contributor to survivor bias in the !NDX was the failure of those high flying dotcom stocks between 2000 and 2002. Even after considering that fact, survivor bias does exist, but not to the extent that would negate a solid long trading system with long term market direction filters. At most it may dampen the rosy results of such a system a bit . My particular trading systems that I have been developing already had an overall market long term trend filter in them which would have kept me out of the market during most of the dotcom bust period, so I intend to carry on with their development and testing, and maybe someday actually trade them. Todd Kellenbenz

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