IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2608.27734.html

What survives honest evaluation? Leakage-safe, search-aware assessment of LLM-driven trading strategy discovery

Author

Listed:
  • Eray Genc{c}ay

Abstract

Large language models (LLMs) are increasingly used to discover trading strategies, and much of the resulting literature shares a methodological weakness: many candidate strategies are generated, the best is reported, and neither look-ahead bias nor the intensity of the search behind the reported result is corrected for. We present a strategy-discovery system that makes both corrections structural rather than procedural. First, the agent can only act through registry-validated tools whose feature space excludes look-ahead by construction; we show that this guardrail is not redundant with statistical correction: a deliberately leaky oracle posting a Sharpe ratio of 35 survives Deflated Sharpe and probability-of-backtest-overfitting testing completely. Second, the system records every strategy evaluation its search performs and deflates all reported performance by that trial count, tracing how the best in-sample Sharpe ratio climbs with each trial while the deflation threshold, driven by the agent's own search, climbs faster. Across a 453-stock point-in-time US equity universe and a 39-ETF multi-asset universe with realistic transaction, impact, and borrow costs, honest evaluation certifies passive benchmarks (out-of-sample confidence intervals excluding zero), rejects every LLM-discovered strategy (across two frontier models, search budgets up to one hundred candidates, and five repeated runs), catching selection luck, predicted rank degradation, and out-of-sample collapse through complementary instruments, and evaluates a human trader's production rule system under identical instruments. The framework formalizes why pre-registered hypotheses earn lower evidential bars than brute search, and quantifies the sample sizes that credible certification of moderate edges actually requires.

Suggested Citation

  • Eray Genc{c}ay, 2026. "What survives honest evaluation? Leakage-safe, search-aware assessment of LLM-driven trading strategy discovery," Papers 2608.27734, arXiv.org.
  • Handle: RePEc:arx:papers:2608.27734
    as

    Download full text from publisher

    File URL: https://arxiv.org/pdf/2608.27734
    File Function: Latest version
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2608.27734. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: https://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.