# Robust performance hypothesis testing with the Sharpe ratio

*Olivier Ledoit* and
*Michael Wolf* ()

*Journal of Empirical Finance*, 2008, vol. 15, issue 5, 850-859

**Abstract:**
Applied researchers often test for the difference of the Sharpe ratios of two investment strategies. A very popular tool to this end is the test of Jobson and Korkie [Jobson, J.D. and Korkie, B.M. (1981). Performance hypothesis testing with the Sharpe and Treynor measures. Journal of Finance, 36:889-908], which has been corrected by Memmel [Memmel, C. (2003). Performance hypothesis testing with the Sharpe ratio. Finance Letters, 1:21-23]. Unfortunately, this test is not valid when returns have tails heavier than the normal distribution or are of time series nature. Instead, we propose the use of robust inference methods. In particular, we suggest to construct a studentized time series bootstrap confidence interval for the difference of the Sharpe ratios and to declare the two ratios different if zero is not contained in the obtained interval. This approach has the advantage that one can simply resample from the observed data as opposed to some null-restricted data. A simulation study demonstrates the improved finite sample performance compared to existing methods. In addition, two applications to real data are provided.

**Keywords:** Bootstrap; HAC; inference; Sharpe; ratio (search for similar items in EconPapers)

**Date:** 2008

**References:** View references in EconPapers View complete reference list from CitEc

**Citations:** View citations in EconPapers (158) Track citations by RSS feed

**Downloads:** (external link)

http://www.sciencedirect.com/science/article/pii/S0927-5398(08)00018-2

Full text for ScienceDirect subscribers only

**Related works:**

Working Paper: Robust Performance Hypothesis Testing with the Sharpe Ratio (2008)

This item may be available elsewhere in EconPapers: Search for items with the same title.

**Export reference:** BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text

**Persistent link:** https://EconPapers.repec.org/RePEc:eee:empfin:v:15:y:2008:i:5:p:850-859

Access Statistics for this article

Journal of Empirical Finance is currently edited by *R. T. Baillie*, *F. C. Palm*, *Th. J. Vermaelen* and *C. C. P. Wolff*

More articles in Journal of Empirical Finance from Elsevier

Bibliographic data for series maintained by Dana Niculescu ().