Accounting for Bonus Shares and Stock Splits in Backtests

Summary

The document describes a backtesting problem involving a large equity universe, pre-adjusted price data, and bonus shares received during the test period. Because the transaction records retain the original share quantity, the extra shares are not represented in the portfolio history and may remain unsold indefinitely. The author asks whether price adjustment alone is sufficient and whether portfolio weights could avoid the quantity issue.

No answer or proposed method is included, so the document does not establish how to adjust holdings, transactions, or returns for bonus shares. It serves as a statement of a corporate-action accounting problem rather than a tested solution. A backtest using split-adjusted prices still needs its position records and trades to reflect changes in share counts; otherwise, quantities and sale behavior can diverge from the intended strategy. The appropriate implementation depends on how the data vendor adjusts prices and how the backtest represents corporate actions.

Key ideas

• Pre-adjusted prices do not by themselves ensure that portfolio share quantities reflect bonus shares.
• Unrecorded bonus shares can persist in holdings and distort when positions are sold.
• The document raises, but does not answer, whether portfolio weights can address the quantity problem.
• Corporate-action handling must align price adjustments with position and transaction records.

Tags

# Dealing with stock splits, and specifically bonus shares, in backtests


# Dealing with stock splits, and specifically bonus shares, in backtests












I have been running a relatively large backtest (>5 years and >5000 stocks), using pre-adjusted price data to try to deal with corporate actions. However, I still have a couple of problems: the first being that I am not sure if I need to do any more adjusting to deal with such actions, and the second being that I receive bonus shares in the backtesting period on occasion from a couple of the companies I am buying and due to the fact my transaction records do not account for this extra quantity they end up being held for years longer than they should be (i.e, up until the present moment as they are never sold).

How should I deal with these bonus shares? Do I need to use portfolio weightings instead of stock quantities? And is there a way to deal with them even if I can only specify stock quantities?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.