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Quantitative Finance · Glossary

What is Divergence decomposition?

Definition 19.3 Research Craft: Predictors, Backtests, Measurement, Portfolios · Chapter 19 — Simulation Versus Live

A divergence decomposition walks the simulated P&L to the live P&L through a sequence of intermediate estimates, each changing one assumption to its live value, and attributes each step’s change to that assumption.

From the research replay to live, an assumption at a time: the quoter’s P&L an hour, averaged over six simulated sessions, at each step of the decomposition, each bar the level after that step. Data: rs_simlive.decomposition.
Figure 19.1. From the research replay to live, an assumption at a time: the quoter’s P&L an hour, averaged over six simulated sessions, at each step of the decomposition, each bar the level after that step. Data: rs_simlive.decomposition.
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