DEFINITION of 'Overfitting'
A modeling error which occurs when a function is too closely fit to a limited set of data points. Overfitting the model generally takes the form of making an overly complex model to explain idiosyncrasies in the data under study. In reality, the data being studied often has some degree of error or random noise within it. Thus attempting to make the model conform too closely to slightly inaccurate data can infect the model with substantial errors and reduce its predictive power.
INVESTOPEDIA EXPLAINS 'Overfitting'
Financial professionals must always be aware of the dangers of overfitting a model based on limited data. For instance, a common problem is using computer algorithms to search extensive databases of historical market data in order to find patterns. Given enough study, it is often possible to develop elaborate theorems which appear to predict things such as returns in the stock market with close accuracy. However, when applied to data outside of the sample, such theorems may likely prove to be merely an overfitting of a model to what were in reality just chance occurrences. In all cases, it is important to test a model against data which is outside of the sample used to develop it.

Stochastic Modeling
A method of financial modeling in which one or more variables ... 
Financial Modeling
The process by which a firm constructs a financial representation ... 
NonSampling Error
A statistical error caused by human error to which a specific ... 
Multiple Linear Regression  MLR
A statistical technique that uses several explanatory variables ... 
Regression
A statistical measure that attempts to determine the strength ... 
Market Value
The price an asset would fetch in the marketplace. Market value ...

Mutual Funds & ETFs
Build A Model Portfolio With Style Investing
This sophisticated approach will add flair to your returns. 
Fundamental Analysis
DoItYourself Analyst Predictions
Regular investors can build their own financial models using the mosaic theory. 
Professionals
Style Matters In Financial Modeling
If you're looking to get a job as an analyst, you'll need to know how to work it. 
Options & Futures
Multivariate Models: The Monte Carlo Analysis
This decisionmaking tool integrates the idea that every decision has an impact on overall risk. 
Active Trading
Introduction To Stationary And NonStationary Processes
What to know about stationary and nonstationary processes before you try to model or forecast. 
Options & Futures
How do you trade put options on E*TRADE?
Learn all about put option trading at E*TRADE. Explore margin accounts and become familiar with the different types of option writing. 
Options & Futures
Do you have to be an expert investor to trade put options?
Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined to predetermined limits. 
Options & Futures
Are put options more difficult to trade than call options?
Learn about the difficulty of trading both call and put options. Explore how put options earn profits with underlying assets fall in value. 
Economics
What's the relationship between r squared and beta?
Learn about the relationship between Rsquared and Beta. Explore how the concepts are related and often used in conjunction with portfolio Alpha. 
Mutual Funds & ETFs
How do hedge funds use short selling?
Learn how hedge funds use short selling to profit from stocks that are falling in price. Explore different analytical techniques hedge funds employ to find investments.