Comparing large-sample maximum Sharpe ratios and incremental variable testing

Michael Hanke and Spiridon Penev

European Journal of Operational Research, 2018, vol. 265, issue 2, 571-579

Abstract: Most existing results on the distribution of the maximum Sharpe ratio depend on the assumption of multivariate normal return distributions. We use recent results from the literature to provide an analytical representation of the distribution of the difference between two maximum Sharpe ratios for much less restrictive distributional assumptions, both with and without short sales. Knowing the distribution of the difference enables us to test ex ante whether or not the inclusion of additional variables leads to a significant improvement in the maximum Sharpe ratio. In addition, we characterize the optimal long-only solution and provide conditions for global optimality.

Keywords: Multivariate statistics; Finance; Maximum Sharpe ratio; Incremental variables; Mean-variance spanning (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:265:y:2018:i:2:p:571-579

DOI: 10.1016/j.ejor.2017.08.018

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