Backtesting

In the economic and financial field, backtesting seeks to estimate the performance of a strategy or model if it had been employed during a past period.

[1] Despite these limitations, backtesting provides information not available when models and strategies are tested on synthetic data.

Historically, backtesting was only performed by large institutions and professional money managers due to the expense of obtaining and using detailed datasets.

For a Value at Risk 1-day at 99% backtested 250 days in a row, the test is considered green (0-95%), orange (95-99.99%) or red (99.99-100%) depending on the following table:[3] For a Value at Risk 10-day at 99% backtested 250 days in a row, the test is considered green (0-95%), orange (95-99.99%) or red (99.99-100%) depending on the following table: In oceanography[5] and meteorology,[6] backtesting is also known as hindcasting: a hindcast is a way of testing a mathematical model; researchers enter known or closely estimated inputs for past events into the model to see how well the output matches the known results.

If the hindcast showed reasonably-accurate climate response, the model would be considered successful.