Market Monk has been doing an interesting series on Survivorship Bias – and how much of a problem it can be. What shocks me is that not one developer of system testing software has dealt with this. Here’s the deal – if you’re testing on the Nasdaq 100, your test is likely to be invalid because of the stocks that have gone away. Or if you’re creating an index based on the S&P 500, then that index will likely not be valid going back in time, say, a year before the index has problems.
So what’s the answer here? One possible answer – create a custom index (with all components) that includes all stocks that have traded in the index. Now, you can get a list and data for all the delisted stocks – but the issue is creating an index that either includes all of those delisted stocks, or have the list be dynamic – meaning that it updates as changes are made. As of this writing, I don’t think one data vendor or system software creator has a tool to deal with the issue. I’ve been chatting with the folks at Norgate Premimum Data services – it sounds like they might be working on something to deal with the issue later this year.