In this section, we discuss how to work with data and data quality issues, including some well-probed techniques used to improve the quality of the data. Though the role of getting and analyzing data can be mundane and tedious, we need not forget that high-quality data are critical to the success of a trading strategy. It is important to realize model output is only as good as the data used to calibrate it. As the saying goes: “Garbage in, garbage out.”
Understanding the structure of financial data is important. We distinguish three different categories of financial data: time series, cross-sectional, and panel data. Time series data consist of information and variables collected over multiple time periods. Cross-sectional data consist of data collected at one point in time for many different companies (the cross-section of companies of interest). A panel data set consists of cross-sectional data collected at different points in time. We note that a panel data set may not be homogeneous. For instance, the cross-section of companies may change from one point in time to another.
Quality data maintain several attributes such as providing a consistent view of history, maintaining good data availability, containing no survivorship, and avoiding look-ahead bias. As all data sets have their limitations, it is important for the quantitative researcher to be able to recognize the limitations and adjust the data accordingly.14
Data used in research should ...