Backtesting a Claimed Option Strategy to Assess Investment Returns

Summary

The document points to a paper describing how to test claims about Bernie Madoff’s reported steady monthly gains by reconstructing a simplified version of the associated strike-conversion strategy. The referenced work presents backtesting as a way to examine whether the claimed returns could plausibly arise from the strategy, rather than relying on a verbal description or headline performance figure.

The paper’s abstract, as reproduced here, says the exercise can be built from freely available data, a spreadsheet, and the Black–Scholes formula. It outlines an educational assignment and a more realistic extension, with questions that a backtest could investigate. This excerpt does not provide the actual model specification, data choices, performance results, or a definitive finding about the fraud. Those details must be checked in the paper, and any replication would depend on assumptions about the strategy and option pricing inputs.

Key ideas

• A backtest can make a claimed investment strategy more concrete and reproducible.
• The referenced study reconstructs a simplified strike-conversion options strategy.
• The proposed educational method uses market data and Black–Scholes option pricing.
• The excerpt describes a methodology but supplies no backtest results or final conclusion.

Tags

# What mathematical models did Harry Markopolos run to prove that Bernie Madoff 1% a month gain was a Ponzi scheme?


# What mathematical models did Harry Markopolos run to prove that Bernie Madoff 1% a month gain was a Ponzi scheme?












http://www.cbsnews.com/news/the-man-who-figured-out-madoffs-scheme-27-02-2009/

> Asked how long it took him to figure out something was wrong, Markopolos said, "It took me five minutes to know that it was a fraud. It took me another almost four hours of mathematical modeling to prove that it was a fraud. "

## Answer by vonjd (score 8, accepted)

https://quant.stackexchange.com/a/19380

You can find everything you want to know about this here (and in a very readable and easily reproducible form):

How Students Can Backtest Madoff’s Claims by Michael J. Stutzer (2009)

From the abstract:

> Markopolos’ writings neither described nor included any specific backtests of the strike conversion strategy. Fortunately, a backtest is relatively easy to implement, using just a few, free data series found online, a single spreadsheet, and the Black-Scholes formula. I developed a disguised, simplified backtest as a home assignment for undergrads students, and extended it into a longer, more realistic paper assignment for another student. Based on those experiences, I describe herein a suitable backtest methodology and questions that may be answered through it.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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